Xiao Chen, Jie Deng and Junbian Yu from the South China Agricultural University, Jinan University and the Shenzhen MSU-BIT University note a body of academic literature on the benefits of connectivity and better operating markets. However, until now studies have been mostly on the benefits of air and High Speed Rail links.
The researchers wanted a more granular picture based on subway network build out, specifically as it may mitigate the effect of stock price crash risk or the asymmetric risk of a big stock price fall based on managers hoarding bad information that builds like water behind a dam, until the dam breaks.
They discovered that firms with headquarters within a 1km radius of a subway line were around 11% less likely to suffer from this problem. They base their conclusion on an analysis of 4,589 firms from 2007~2023 and the work has been possible because China has built so many subway lines over that time there’s scope for a lot of before and after analysis.
THE KEY TAKEAWAY for investors is better connected companies get more analyst and journalist visits and therefore end up being better communicators and are less inclined and/or able to hide bad information.
This is what every good analyst and investors knows i.e. there’s no substitute for wearing out the shoe leather and face-to-facing management whenever possible. Nice to see it’s also a provable notion.
You can read the paper in full via this link Subways, Information Flow, and Stock Price Crash Risk.
As an aside there’s this graphic, below, in the paper highlighting China’s progress in subway construction to 2023. All I can say is ‘gol-eee!’.
Happy Sunday.