In Search of Concepts: The Effects of Speculative Demand on Stock Returns

AuthorIftekhar Hasan,Qingwei Wang,Ru Xie,Owain Ap Gwilym
Published date01 June 2016
Date01 June 2016
In Search of Concepts: The Effects of
Speculative Demand on Stock Returns
Owain Ap Gwilym
Bangor Business School, Hen Goleg, College Road, Bangor, LL57 2DG, United Kingdom
Iftekhar Hasan
Gabelli School of Business, Fordham University, New York, NY 10023, USA; and Bank of Finland,
00101, Helsinki, Finland
Qingwei Wang
Cardiff Business School, Aberconway Building, Colum Drive, Cardiff, CF10 3EU, United Kingdom
Ru Xie
Bangor Business School, Hen Goleg, College Road, Bangor, LL57 2DG, United Kingdom
Using a novel proxy of investorsspeculative demand constructed from online
search interest in investment concepts, we examine how speculative demand affects
the returns of Chinese stocks. We nd that speculative demand increases following
high market returns and predicts subsequent return reversals. Moreover, the
speculative demand explains more variation in subsequent returns of A shares
(more populated by retail investors) than B shares (less populated by retail
investors). Our ndings support the recently developed attention theory.
Keywords: investment concepts, speculative demand, investor attention, market
returns, trading volume
JEL classification: G02, G12, G14
We thank the Editor (John Doukas) and an anonymous referee for their help and guidance.
We also thank Franklin Allen, Chunxin Jia, Nancy Qian, Jianhua Xie, Wei Xiong and
seminar participants at the Princeton University & Peking University Symposium on
Chinas Financial Markets for helpful discussions. We also thank Yizheng Wang for his
excellent research assistance. Errors and omissions remain the responsibility of the authors.
European Financial Management, Vol. 22, No. 3, 2016, 427449
doi: 10.1111/eufm.12067
©2015 John Wiley & Sons, Ltd.
1 Introduction
Recent studies show that indiv idual investors tend to speculate in the stock markets and
hold stocks with lottery-lik e payoffs (Kumar, 2009; Dorn and H uberman, 2010; and
Han and Kumar, 2013). For thei r speculation to have a signican t impact on stock
returns, individual inves tors must trade on the same st ocks at about the same time
(Barber et al., 2009). However , there are thousands of stocks on th e market. Upon
which one(s) should they sp eculate? Froot et al. (1992) show th at short-horizon
speculators will attempt to l earn what other speculators also know. If we can track such
efforts, we can measure sp eculatorswillingness to speculate and examine it s effect on
asset prices. Such a measure i s difficult to identify because those ef forts are typically not
We propose a novel measure based on individual investorsonline search for
investment ideas and concepts. Arguably, investment conceptsor ideasprovide ideal
information for speculators to herd on, which may explain why speculative bubbles often
start with the emergence of investment concepts such as dot-coms during the internet
bubble. When such information is publicly available online, individual investors can
simply use search engines. Knowing that others can nd similar information online,
investors know what they can herd. Google provides a search volume index to track
search intensity on certain keywords over a dened period relative to the total number of
searches during that period. Da et al. (2011) provide evidence that individual investors
are more likely to use Google to search for information than are professional investors.
Therefore the search volume index on the keywords related to investment conceptsand
ideasmay reveal individual investorsinterest in speculation.
Using a measure of investorsspeculative demand constructed from the search volume
index in Mainland China on the keyword concept stocks, we examine how speculative
demand affects the returns on Chinese stocks. Concept stocks, prone to speculation,
typically rely on certain business and investment opportunities or the emergence of a new
technology. These stocks usually have highly uncertain growth prospects and are
difficult to value, which leaves more room for heterogeneous views and speculation.
Concept stocks in China are linked either with certain events or industries. The events
can be mega sport events, political events or major rm events (e.g., merger and
acquisitions). For example, the 2008 Beijing Olympic Games were believed to benet
tourism, construction and retail businesses, therefore the stocks of related companies are
classied as Olympic-concept stocks. The dot-com industry and new energy industry are
two further examples related to concept stocks. Once the companies are classied as
concept stocks, they attract substantial investor attention and can become considerably
overpriced. Shanghai Maling is a frequently cited example of overpriced concept stocks
related to the dot-com industry in China. The company produces canned food for urban
area markets. In June 1998 Shanghai Maling set up a website for selling its own products,
and was subsequently labeled as an internet concept stock. While its main business
remained the same, the companys share price soared from 149.96 Chinese yuan on
December 30, 1999 to 552.7 Chinese yuan on February 18, 2000 before tumbling 46%
four months later. In the literature, concept stocks are related to several heated
speculative episodes, including the biotechnology bubble in the 1980s and the dot-com
bubble in the 1990s (Hsieh and Walkling, 2006). These authors document the history and
performance of concept stocks thoroughly, revealing that concept stocks are overpriced
because they underperform in the long run.
©2015 John Wiley & Sons, Ltd.
428 Owain Ap Gwilym, Iftekhar Hasan, Qingwei Wang and Ru Xie

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