Can Retail Investor Attention Enhance Market Efficiency? Insights from Search Engine Data

Abstract

This study provides novel insights to the ongoing debate how market efficiency is challenged by investor behavior. Applying search engine data we find that retail investor attention can enhance market efficiency. High attention is associated with better incorporation of idiosyncratic stock information, which we interpret as improved pricing efficiency. This effect is even more pronounced in bullish markets. In bearish markets, however, retail investor attention leads to a deterioration of pricing efficiency, which might be explained with herding behavior. Our evidence holds for a broad sample of European and US stocks.