Ambiguities in valuing information technology firms: Do internet searches help?

Abstract

A presence of accessible information can make investors better informed with improved efficiency in valuation. However, it is not uncommon to observe price anomalies in financial markets, possibly because of investors' attention constraints. In our study, we examine the differences in the value of Internet searches for price discoveries for IT firms when investors encounter difficulties in valuation. Through our cross-sectional analyses, we find a negative association between Internet searches and return comovements and interestingly the association between the two becomes larger as the level of ambiguities stemming from intangible attributes increases. We also show that the degree to which a firm's returns comove is sustained over longer periods when coupled with a shock to intangible attributes than market-wide volatilities. Overall, our study provides deeper insights into the role of Internet searches and their interplay with ambiguities in adjusting valuation bias and the dynamic aspects of return comovements.