Google Search Volume and Financial Analyst Information Environment: Does Investors’ Information Demand Affect Information Uncertainty and Precision?

• In Event: Forecasts and Analysts

Abstract

Using Google Trend data obtained on S&P500 firms’ official tickers, this study investigates whether the increased demand of firm-specific information from the investors impacts the financial analysts’ effort to collect, analyze, and produce forecasts. Motivated by the gap in current literature in understanding retail investors’ use of search engine for firm-specific information outside earnings announcements period and its effect on firms’ overall information uncertainty, public and private information precision, this study examines whether the timing, volume, and velocity of investors’ demand for information explains the properties of financial analysts’ information environment.

Results in this study show strong empirical evidence that (1) abnormal demand for firm-specific information, proxied by abnormal Google Search Volume, reduces the overall information uncertainty and increase both public information precision and private information. (2) While abnormal demand for information outside earnings announcements period improves information precision, abnormal trading volume reduces public information precision. (3) The effect of abnormal demand for information on the overall information uncertainty, public and private information precision is particularly stronger for firms that issue dividends in the prior quarter.

The important implication of this study is that while all information available through web search is, by default, historical; however, the timing, volume, and velocity of the demand for firm-specific information would manifest in the improvement of financial analyst effort in producing forecasts, evident through the reduce in overall information uncertainty, and increase in both public and private information precision, thereby creating more accurate, decision-relevant forecasts.

Author

• Tien Lee, McMaster University