The Geographic Dispersion of Google Search and the Market Reaction to Earnings Announcements

• In Event: Financial Accounting and Reporting # 2

Abstract

We use the geographic dispersion of internet search as a measure of the breadth of investor interest in a firm, and hypothesize that broader interest will improve the spread of information. We examine how the geographic dispersion of internet search affects information asymmetry around earnings announcements and the market’s response to earnings announcement information. We predict and find that firms tend to have a disproportionate amount of search concentrated in their headquarters state. However firms vary significantly in how geographically dispersed the investors are who search for the firm. Controlling for other elements of the firms’ information environment, including the level of Google search and announcement-window press coverage, we find that firms with a higher geographic dispersion of individuals searching for the firm experience a stronger response to their earnings announcements. We find that more widely searched firms experience lower abnormal bid-ask spreads and higher abnormal trading volumes at the time of the announcement, suggesting higher liquidity and lower information asymmetry. We also find that more widely searched firms experience larger earnings response coefficients during the earnings announcement window and weaker post-earnings-announcement drift, suggesting a faster incorporation of information into price for firms with more geographically dispersed search.

Authors

• Sabrina Chi, University of Arkansas

• Devin M. Shanthikumar, University of California, Irvine