Geographic Proximity and Information Efficiency of Capital Market:Evidence from China

This paper utilizes the launch of China's high-speed railway (HSR) as an exogenous policy shock to identify the causality between geographic proximity and the information efficiency of capital markets. Since the HSR shortens geographic distances between investors and companies, it can improve the flow of information and reduce stock price synchronization. We adopt a difference-in-difference (DID) strategy to identify this causal effect and construct the time-varying minimum spanning tree as an instrumental variable to address the selection issue on HSR's route placements. We find that HSR significantly reduces stock price synchronicity by 6.82%. Such effects are more remarkable in firms with fewer analyst reports, and inter-province HSR has a greater effect on firms than intra-province HSR. Further analysis of mechanisms shows that better geographical proximity improves the information efficiency of the capital market by facilitating institutional trading and improving companies' information transparency.