The transformative technologies that enable the “Information Age”—exemplified in Google searches of the Internet—are making financial markets more efficient.
According to a new study co-authored by Jacob Thornock, an assistant professor of accounting at the University of Washington Foster School of Business, corporate earnings announcements are preceded by an abnormally high and rising volume of Google searches for a firm’s stock ticker. Investors trade on the information they find. And, as a result, share prices anticipate the earnings announcement, effectively softening the slope of peaks or plunges that traditionally follow the periodic release of earnings information.
“As investors gather and trade on information prior to earnings announcements, market prices begin to partially reveal that information,” explains Thornock. “As a consequence, there is less of a price reaction when the information is announced because a greater portion of the earnings news is anticipated.”
A proxy for info search
To investigate the market impact of investors acquiring financial information, Thornock and co-authors Michael Drake and Darren Roulstone devised a solid proxy in the ubiquitous Google search. Specifically, Google searches for a company stock ticker (think MSFT or AMZN).
The researchers collected daily Google search volumes for firms listed in the S&P 500. For each ticker, they measured volumes on the days leading up to an earnings announcement and compared them to normal search volumes—and even to search volumes during the run-up to other public disclosures (such as management forecasts, analyst forecasts and dividend announcements).
Thornock says the data reveal unusually high volumes of Google searches in the two weeks prior to an earnings announcement, spiking markedly on the day of the announcement. What’s more, an evaluation of share prices during the same periods reveals that the market reaction to earnings news is partially preempted when the volume is abnormally high. The reaction is less dramatic—up or down—on the actual announcement.
Google search is not a perfect proxy. “We can’t see click-through data,” Thornock explains, “so we can only speculate what information people are seeking on Google.
“But the increase in search volume appears to improve price discovery. It looks as if investors are able to gather information via Google, trade on that information and effectively preempt the news that’s about to come out.”
Proper use of technology
The study, Thornock says, indicates that consumers are actively using Internet search technology to attain information on firms in which they invest. And, more significantly, they are using that information wisely.
“Our findings suggest that investors are not just Googling for earnings information, they’re Googling for earnings information correctly,” he adds. “These emerging technologies are helping people become more informed. And more informed investors make for more efficient markets.”
“Googling for Information Around Earnings Announcements” is the work of Michael Drake and Darren Roulstone of the Ohio State University Fisher College of Business, and Jacob Thornock of the University of Washington Foster School of Business.