Distance, High-Speed Railway Connection, and Price Efficiency: Evidence From China

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