RMIT research shows connection between internet access & stockmarket stability

What are the ramifications for the stockmarket when you turn off the Internet? According to the latest research, published in the Journal of Financial Economics, limiting access to research can impact investors' decision-making — increasing the risk of a stock market crash.

An RMIT study into the 2010 withdrawal of Google from mainland China examined the impact of the search engine’s exit and the subsequent impact on investment markets. For those who are looking to study at RMIT, such as completing an MBA online in Australia, this study is an example of how research can take you to some truly fascinating places.

Challenging Assumptions

The RMIT study results challenged past assumptions of the influence of search engines and their behavioural impact on investors.

Dr Gaoping Zheng, lead researcher, highlighted that the findings of this study challenged previous thinking that results simply justified the existing ideas of investors, noting that search functions more as a facilitator for decision-making, rather than solely as a validation tool.

“Until now it’s been widely thought that unrestrictive internet searches result in bias and an overvaluation of stocks but that would mean restricting search would decrease stock market crash risk. Instead, we saw a significant jump,” Zheng said. “This suggests internet searching does not exacerbate investors’ biases instead, it facilitates their ability to access and analyse information.”

Studying a Search Engine Withdrawal

China’s stock market is one of the largest in the world — and with nearly a quarter of a billion individual investors, it presents a unique opportunity for a study in a near-natural replication of other markets.

The research, undertaken by Dr Zheng’s team, was rather novel in its approach. By dividing a list of Chinese firms into two groups — one, which had a high search volume on Google before their 2010 withdrawal, and a second group, which were not regularly searched for on the platform.

Measuring the impact on the average stock price risk before and after Google’s withdrawal, the team was able to identify that the group of stocks that were regularly searched on Google were 19% more unstable than the group of lesser searched firms.

The research delved into the role of search engines such as Google in providing a search result that is less likely to be constrained by political constraints, unlike state-owned platforms which are restricted under severe domestic censorship regulation.

Commenting on the research, Zheng noted that these restrictive search conditions result in investors being less informed, and are more likely to fall prey to deceptive conduct and other biases. “If managers withhold negative news, investors are less likely to mitigate their misconceptions and biases surrounding a certain stock,” she said, highlighting how transparency and corporate accountability can be crucial in keeping companies honest to potential shareholders.

An Australian Perspective

The research provides helpful insights into the potential impact on markets if search engines such as Google choose to exit the Australian market. While many nations have many more accessible search engines, Google still holds a dominant market share in web search traffic in Australia, so it’s reasonable to consider what the impacts may be if they were to leave the Australian market.

In a world that is increasingly digital, interconnected, and challenging, the research undertaken by Dr Zheng’s team highlights how access to unbiased information is critical in mitigating the risks of volatile stock markets.

Image credit: iStock.com/Andrii Fomenko