Expanding Footprints: The Impact of Passenger Transportation on Corporate Locations

May 17, 2023

Expanding Footprints: The Impact of Passenger Transportation on Corporate Locations
Yatang Lin, Yu Qin, Johan Sulaeman, Jubo Yan, Jialiang Zhang
Review of Finance, Volume 27, Issue 3, May 2023, Pages 1119–1154, https://doi.org/10.1093/rof/rfac049

Corporate expansions of geographic footprints may reduce its exposure to local economic shocks and allow firms to exploit potential investment opportunities, but face substantial challenges, such as higher monitoring cost and more difficult access to information. In this paper, we exploit the massive rollout of China’s high-speed rail (HSR thereafter) network on corporate geographic footprint. Specifically, we link the expansion of China’s passenger HSR network with the registration information of the universe of Chinese firms, which comes from the registration information of the universe of Chinese firms from 2004 to 2015. For any firm registered during this period, we can identify its shareholders and the addresses of these shareholders. Therefore, we can trace the geographic footprint of a firm by linking it to any new firms that it invests in, either as a controlling or non-controlling shareholder. This universe of corporate registrations captures all new firm activities in China, allowing us to evaluate investment patterns across all regions and sectors in China.

We aggregate firm-level investment flows (from a shareholder in city A to a new firm in city B) to investment flows between Chinese city pairs. We then implement a difference-in-differences specification to examine whether the introduction of an HSR connection between a given city pair is associated with an increase in bilateral investments between the pair, compared to unconnected city pairs.  We find that direct HSR connection between a pair of cities increases the number of investments between the city pair by 8%, and the amount of investment increases by 45%. The results are robust when we control for city-pair heterogeneity and time-varying local shocks that could potentially drive the selection of new HSR routes. To address the potentially endogenous formation of HSR network, we exploit the indirect high-speed rail connections of non-nodal cities on vertical and horizontal railway lines. Our results are robust when we consider only city pairs that are indirectly connected by the HSR system, which are unlikely to be connected on purpose.

The introduction of HSR connection increases intercity investment flow for both controlling and non-controlling shareholders, indicating that both improved monitoring capabilities and access to information serve as important underlying channels of the HSR effect. Although quantifying the welfare effect of the HSR system is not the main focus of the paper, we also document that the incremental intercity investments associated with HSR connections help to close the return-to-capital gap between the origin and destination cities, which suggests welfare improvement from the perspective of capital allocation efficiency.

Figure 1. Dynamic Effect of HSR Announcement and Connection on Intercity Investments

Notes: The figures visualize the dynamic impact of the announcement and operation of high-speed rail network on intercity investment. The top panel reports the extensive margin (# of investments) of intercity investment flows around the introduction of direct HSR connection, whereas the bottom panel reports the intensive margin (total amount of investments). The coefficients are presented in dots, with their 95% confidence intervals.