If the past year and a half has taught us anything about the stock market, it’s that it’s often anything but rational. After a pandemic-induced crash, markets rushed to record heights, and meme stocks like GameStop (GME) surged out of control. Yes, global markets have truly been a rollercoaster, and the ride’s not done yet. But if there’s one thing the market always loves, it’s freedom — even when it’s the freedom to buy silly stocks.

It’s perhaps not surprising then that research from RMIT University in Australia has found that restricting internet searches for investors increases stock market crash risk by 19%.

When silencing inflates markets

The researchers looked at the ramifications of Google’s withdrawal from mainland China in 2010. Google had set up shop in China four years earlier, but in 2010, the tech giant discovered a cyberattack from within the country that targeted both itself and dozens of other companies. In its investigation, Google also found that the Gmail accounts of a number of Chinese human-rights activists had been hacked.

Google was also censored in China. For a while, the company tried to offer some services to the Chinese market. Results were filtered and censored, but Google continued its activity. But following the 2010 attacks, the company directed all its Chinese traffic to the uncensored Hong Kong version of Google — which led to the company being de facto banned in China.

This had many effects, but one of them, revealed in the recent study, is that it affected investors’ ability to make informed decisions. With manipulated search results (that often showed overly positive information), the stocks of some companies became overvalued, increasing stock market crash risk by 19%, the researchers found.

Lead researcher Dr. Gaoping Zheng, a lecturer in finance at RMIT, said the study showed search results influenced decisions, challenging 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.”

“While China has alternative search engines, their results are concentrated and an identical search on Google would show vastly different results,” Zheng said.

For investors, especially those new to the fray, the lack of accurate, unfiltered information can be disastrous. Amateur traders have taken over large swaths of the market, but they are often less informed and versed. For a new trader who may not understand the intricacies of the stock market (especially when it comes to things like leverage or how commodities work), not having access to the whole picture could spell disaster.

The importance of this isn’t limited just to China or other places that censor search results. Recently, Google has threatened to remove its search engine from Australia over the country’s proposed law to make Google share news royalties with publishers. Should this happen, Zheng says it could spell problems for the entire market.

“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.”

To measure the impact, researchers divided a list of Chinese firms into two groups: firms that had a high search volume on Google prior to 2010 and firms that were not regularly searched for on Google in the same interval.

By averaging the stock price cash risk of both groups after Google withdrew and comparing their standard deviation, the researchers found firms that were regularly searched for on Google were much more unstable. Zheng believes this may be caused by the search results Chinese investors were offered, which were more likely to show positively biased information from websites hosted in China.

“Google was more likely to show content from international websites such as Bloomberg, Reuters or The New York Times, which are free from political constraints to talk about what is happening,” she said.

“Investors were more likely to overvalue stocks due to biased information found through Chinese-owned search engines.”

Ultimately, the moral of the story is that free, unfettered information leads to healthier markets — and the lack of free information can spell market trouble down the line.

“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,” Zheng concludes.

The study was published in the Journal of Financial Economics.