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Value of internet search for stock markets revealed

New research from RMIT has found that suppressing internet searches creates stock market instability.

The research reviewed the impact on stock markets of Google's decision in 2010 to unexpectedly withdraw its search business from China.

It found that risk of a stock market crash increases when firms can hide adverse information and when information intermediaries are less effective in assisting investor's information processing.

The study has been published in the Journal of Financial Economics.

Lead researcher Gaoping Zheng, lecturer in finance at RMIT, said the study showed search results influence investor decisions, a challenge to previous thinking that they merely justified people's existing ideas.

"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."

She added that following Google's recent attempt to withdraw from Australia after new regulation threatened to force it to pay news publishers, the research may have implications for Australia.

"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."

Zheng said restricted searches gave firms opportunities to hide adverse news from the public, preventing potential investors from discovering accurate information online.

"If managers withhold negative news, investors are less likely to mitigate their misconceptions and biases surrounding a certain stock," she said.

"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."

Read more: GoogleRMITGaoping ZhengJournal of Financial Economics