Google, stock market, carrots and cancer
The research looked at the ramifications on the stock market following Google’s withdrawal from mainland China in 2010. This meant investors could not access content from international websites such as Bloomberg, Reuters or The New York Times, which are free from political constraints.
Manipulated results and market crash risk
Lead researcher Dr Gaoping Zheng, a lecturer in finance at RMIT, said the study showed search results influenced decisions, contrary to previous thinking that they merely justified people’s existing ideas.
On the other hand, search results manipulated to show overly positive information led to stocks for those companies being overvalued temporarily, increasing the stock market crash risk by 19%.
Restricted searches gave firms opportunities to hide adverse news from the public, preventing potential investors from discovering accurate information online, noted Zheng.
“If managers withhold negative news, investors are less likely to mitigate their misconceptions and biases surrounding a certain stock,” she said.
The carrot metaphor
“Let’s say I believed that eating carrots could cure cancer and searched the internet to confirm this. An unrestricted search would correct my bias because I would find that carrots are not actually a cure for cancer.”
Until now it’s been thought that unrestrictive internet searches lead to bias and an overvaluation of stocks but that would mean restricting search would decrease stock market crash risk, said Zheng. “Instead, we saw a significant jump.”
“This suggests internet searching does not exacerbate investors’ biases – instead, it facilitates their ability to access and analyse information.”
The research has implications for Australia following Google’s recent attempt to withdraw from the country. “While China has alternative search engines, their results are concentrated and an identical search on Google would show vastly different results,” Zheng said.
“Our research emphasises the importance of access to diverse results and if Google did decide to withdraw, it could have a destabilising impact on the economy.”
Google in China
In 2010, Google unexpectedly withdrew its searching business from China, reducing investors’ ability to find information online.
To measure the impact, researchers divided a list of Chinese firms into two groups: firms that had a high search volume on Google prior to 2010 and firms that were not regularly searched for on Google prior to 2010.
By averaging the stock price crash risk of both groups after Google withdrew and comparing their standard deviation, the researchers found firms that were regularly searched for on Google were 19% more unstable.
Zheng said while Chinese investors could still look for information about stocks using other search engines, they were more likely to be shown positively-biased information from websites hosted in China.
“Investors were more likely to overvalue stocks due to biased information found through Chinese-owned search engines.”
The study has been published in the Journal of Financial Economics.