The Effect of High-Speed Rail Connectivity on Capital Market Earnings Forecast Error: Evidence from the Chinese Stock Market

TL;DR

This paper investigates how China's high-speed rail expansion improves analyst earnings forecast accuracy by reducing geographic and informational barriers, highlighting transport infrastructure's role in financial information flow.

Contribution

It provides empirical evidence that high-speed rail connectivity decreases forecast errors by easing analyst access to private soft information, a novel perspective on infrastructure's financial impact.

Findings

Forecast errors decline after HSR connectivity is established.

Placebo tests confirm the effect is due to actual infrastructure changes.

HSR reduces analysts' costs of gathering private information.

Abstract

This study examines how China's high-speed rail (HSR) expansion affects analyst earnings forecast errors from an economic information friction perspective. Using firm-year panel data from 2008-2019, a period that covers HSR's early introduction and rapid nationwide rollout, the findings show that analysts' relative earnings forecast errors (RFE) decline significantly only after firms' cities become connected by high-speed rail. The placebo test, which artificially shifts HSR connectivity 3 years earlier than the actual opening year, yields an insignificant DID coefficient, rejecting the possibility that forecast errors were improving before the infrastructure shock. This supports the conclusion that forecast error reduction is linked to real geographic accessibility improvements rather than coincidence, pre-existing trends, or analyst anticipation. Economically, the study highlights that HSR reduces analysts' costs of gathering private, incremental information, particularly soft information obtained via plant or management visits. The rail network does not directly alter firms' internal capital allocation or earnings generation paths, but it lowers spatial barriers to information collection, enabling analysts to update EPS expectations under reduced travel friction. This work provides intuitive evidence that geography and mobility improvements contribute to forecasting accuracy in China's emerging, decentralized capital market corridors, and it encourages future research to consider transport accessibility as an exogenous information cost shock rather than an internal firm-capital shock.