Geographic Proximity and Price Efficiency: Evidence from High-speed Railway Connections Between Firms and Financial Centers

Abstract

We study how geographic proximity to financial centers affects price efficiency. Using high-speed railway connections between firm cities and their nearest financial centers in China as exogenous shocks, we find stocks of connected firms are more efficiently priced than those of firms that are not connected. Consistent with our hypothesis, ease of travel has a stronger effect on firms that are closer to financial centers, smaller, have less institutional ownership and financial analyst coverage, and are not on the short sales list. Our paper highlights the importance of the geographic proximity of firms to financial centers on financial market efficiency.

Keywords: Price efficiency; Geographic proximity; High-speed railway; Information acquisitions

JEL Classification: G10; G14