Faster than Flying: High-Speed Rail, Investors, and Firms

We study the effects of a direct high-speed rail (HSR) service between two cities on investors and firms in China. We find that, after an HSR introduction, investors make more cross-city searches and block purchases of firms in connected cities. An HSR introduction also leads to less co-movement among local stocks and more co-movement between stocks in connected cities. Firms located in more central cities in the HSR network enjoy higher firm valuation, lower cost of equity, and better liquidity, in part through the channel of increased investor recognition. The HSR effects on valuation, cost of equity, and liquidity are more pronounced among small firms and when the connected city-pair distance is below 1,500 km, for which HSR is faster than flying.