Online Search Frequency, Retail Investor Overreaction, and the Cross-Section of Stock Returns: Evidence from the Chinese Stock Market

I find a strong negative relation between online search frequency and future returns on the Chinese stock market. I suggest that this effect captures retail investor overreaction to unexpected signals, because online search frequency reflects the efforts made by investors to obtain firm-specific knowledge. The effect is particularly strong in stocks with high information uncertainty (high analyst dispersion, big past earnings surprises, low analyst coverage, and large trading volume), whose intrinsic values are difficult or costly for investors to estimate. Online search frequency as a direct indicator of retail investors' reaction to signals also sheds light on the idiosyncratic volatility (IVOL) puzzle. I find that this puzzle is more pronounced in high-search-frequency subsamples and disappears in low-search-frequency subsamples. Further evidence shows that high search frequency strengthens the negative IVOL effect in stocks with positive signals but weakens this effect in stocks with negative signals. I suggest that the IVOL puzzle in the Chinese market can be partially explained as a reversal following overreaction to positive signals by retail investors.