How transportation mitigates stock crash risks for remote firms

Distance from financial centres can breed obscurity, inviting sudden revelations that shatter market confidence

Featured faculty: Desmond Tsang
Written by Putro Harnowo

China’s high-speed rail reached a new milestone last year by surpassing 50,000km, making it the world’s longest network of bullet trains. In less than two decades, the lines now connect 97 per cent of Chinese cities with populations exceeding 500,000. This connectivity isn’t just about convenience but also about helping businesses navigate uncertainty with greater confidence.

A new high-speed rail line changes how investors view firms they previously perceived as out of reach. More connectivity also means more oversight, particularly over companies that deliberately sugarcoat their financial reports, which occasionally haunts the market.

Historically, many international giants have fallen for concealing poor performance. Wells Fargo was heavily fined for secretly opening millions of fake accounts to meet sales goals, and Wirecard filed for bankruptcy after its accounting fraud came to light.

“When negative information withheld by management eventually becomes public, they normally see their company stock price suddenly fall or crash,” says Desmond Tsang, an Associate Professor of Real Estate at the School of Hotel and Tourism Management at the Chinese University of Hong Kong (CUHK) Business School.

To ensure due diligence, institutional investors, such as mutual funds, pension funds, and insurance companies, regularly conduct corporate site visits to the firms they invest in, where financial analysts and fund managers meet rank-and-file employees to obtain information that supplements the firm’s financial statements.

“Unlike virtual meetings, corporate site visits allow financial analysts and fund managers to directly observe operations, management practices, and local conditions that can improve information accuracy and quality,” Professor Tsang adds. “This ‘soft information’ often reveals early warning signals of a stock crash and is difficult to capture remotely.”

Firms with less oversight are more likely to conceal their poor performance. Unfortunately, site visits depend heavily on location, so institutional investors typically only come when the benefits outweigh the inconvenience of travelling, leaving remote firms with less scrutiny.

Professor Tsang’s study finds that firms headquartered far from financial hubs, where institutional investors are concentrated, are significantly more prone to stock crashes. His study of Chinese firms also shows that the rapidly expanding high-speed rail network improves corporate site visits, hence lowering crash risks.

“The benefits of site visits are especially pronounced for distant firms, underscoring the role of transportation infrastructure in narrowing information gaps and improving transparency.”

Professor Desmond Tsang

Leaving no stone unturned, only if it’s convenient

Substantial stock ownership gives institutional investors immense influence over corporate governance and the strategic direction of the firms they invest in. The study titled Needed but not there: Firm location, corporate site visits, transportation, and stock price crash risk shows that company managers tend to be more honest with investors about their financial performance during site visits.

Along with Chu Xiaoling at the University of Macau and Lo Kin at the University of British Columbia, Professor Tsang examines the location of more than 1,500 Chinese companies listed on the Shenzhen Stock Exchange and tracks their share prices from 2012 to 2019. The team also collects information on high-speed rail station openings across China and matches it with corporate site visit data during the same period.

The analyses find that although firms with higher risk require more monitoring, the greater geographical distance imposes higher travel costs and considerable hurdles, making institutional investors less likely to visit remote firms in person. Ultimately, fewer corporate site visits are associated with a greater risk of a stock price crash.

“Site visits are not just busywork and particularly crucial for distant firms,” Professor Tsang says. “They cannot be substituted by informal exchanges of soft information between company managers and investors.”

Surprisingly, site visits do not necessarily reduce the risk of stock crashes for firms headquartered near financial centres. Due to their proximity, these firms are already under heightened scrutiny from their stakeholders.

How high-speed rail bridges the information gap

The Shenzhen Stock Exchange requires listed firms to publish a detailed record of each corporate site visit within two trading days, and the study finds significant market reactions around these days. This timely disclosure improves information quality, making stock price movements more closely reflect the company’s actual performance.

However, conducting these essential visits, especially to firms located remotely from the financial centre, often entails high travel costs and logistical challenges. Fortunately, the rapid expansion of China’s high-speed rail eases the burden.

The openings of the high-speed rail stations are found to increase the number of corporate site visits. Stock crash risk for firms connected with new stations decreases significantly following the launch of the high-speed rail network.

As financial analysts and fund managers become more likely to visit, the stocks of firms well-connected to the high-speed railway network are priced more accurately than those of firms that are not connected.

Takeaways for businesses and policymakers

While the study’s empirical setting is in China, Professor Tsang notes that its fundamental mechanisms, including information gap and stock price crash risk, are universal. “The findings should be relevant to emerging and developed markets, where companies don’t always share all the information with investors and transportation systems are visibly improving.”

“The benefits of site visits are especially pronounced for distant firms, underscoring the role of transportation infrastructure in narrowing information gaps and improving transparency,” he adds. “Therefore, policymakers may see value in promoting investor access to remote firms as part of market stability measures.”

For institutional investors, the study proves that physical site visits remain a critical and indispensable channel for exercising robust monitoring. As the inconveniences of site visits can affect stock crash risk, investors should account for travel time when evaluating investment opportunities and weigh other forms of due diligence carefully for firms that are difficult to visit.

For businesses that are inherently remote, such as those in the mining and agriculture sectors, Professor Tsang suggests that proactively offering site visits and transparent reporting can reduce the risk of stock crashes. Enhanced disclosure and hybrid engagement, such as physical visits accompanied by digital tools to check remote facilities, may also help bridge the gap.