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Transportation infrastructure and resource allocation of capital market: evidence from high-speed rail opening and company going public
Transportation infrastructure and resource allocation of capital market: evidence from high-speed...
Jin, Zhi; Zhang, Liguang; Xin, Qingquan
CHINA JOURNAL OF ACCOUNTING STUDIES 2020, VOL. 8, NO. 2, 272–297 https://doi.org/10.1080/21697213.2020.1822024 ARTICLE Transportation infrastructure and resource allocation of capital market: evidence from high-speed rail opening and company going public a a b Zhi Jin , Liguang Zhang and Qingquan Xin a b School of Accountancy, Southwestern University of Finance and Economics, Chengdu, China; School of Economics and Business Administration, Chongqing University, Chongqing, China ABSTRACT KEYWORDS Transportation Using the high-speed rail opening of each city in China as a natural infrastructure; company experiment, we apply the difference-in-differences model to investi- going public; high-speed rail gate how the transportation infrastructure in a region affects the opening; information behaviour of local company going public. We find that after high- asymmetry speed rail runs through a city, the number of local company going public increases significantly, and the approval probability of going public is improved significantly. Further mechanism analysis shows that the high-speed rail opening reduces the cost of obtaining pri- vate information about local companies, making it easier for them to absorb venture capital and hire high-quality intermediary institu- tions. In addition, the decline of information cost both enables external stakeholders to select better companies and lowers the financing cost of these companies. This paper shows that the improvement of transportation infrastructure can improve corporate financing efficiency and optimise the efficiency of resource allocation in capital markets. 1. Introduction China covers a vast territory with 9.6 million square kilometres, but the economic develop- ment between regions is very uneven. Listed companies are very important to local economic development, especially in areas with relatively backward economies, because they not only can bring much capital to the region but also increase employment and tax revenue. In terms of the number of listed companies, the land area of the four first-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen accounts for only 0.33% of China’s land area, but 27.47% of the listed companies concentrate in these cities. For three major city groups such as the Pearl River Delta, Yangtze River Delta and Beijing-Tianjin-Hebei, their land area accounts for only 2.31% of China’s land area, but 54% of listed companies are located here. This shows that the geographical distribution of listed companies in China is extremely unbalanced. If this situation continues to exacerbate, it will further widen the gap CONTACT Liguang Zhang firstname.lastname@example.org School of Accountancy, Southwestern University of Finance and Economics, Chengdu, China Paper accepted by Kangtao Ye It is the distribution of A-share listed companies in China by the end of 2017. © 2020 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/ licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. CHINA JOURNAL OF ACCOUNTING STUDIES 273 between the rich and the poor regions, thus affecting the sustainable development of China’s economy. The reasons why listed companies in China are so concentrated in those places are as follows: Since the approval system for the public offering of stocks is launched in China’s capital market, filing an application package with the Chinese Securities Regulatory Commission (CSRC) for approval is necessary for listing; Theretofore, companies applying for listing need not only hire a broker for pre-listing counselling and stock underwriting after CSRC approval but also hire an audit firm and get support from institutional investors and analysts; More crucially, the CSRC staff also need to go to the company to investigate and collect evidence, and communicate with the company face to face; Only those approved by the CSRC can engage in an initial public offering. In other words, regulators, intermediaries (brokers, audit firms and law firms) and institutional investors need to conduct corporate site visits before CSRC approval, so the accessibility of the company’s location becomes very important. China’s two major stock exchanges are located in Shenzhen and Shanghai, the CSRC is located in Beijing, and audit firms, brokers and other intermediaries are mainly concentrated in the four first-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen. These four cities as well as other cities around them not only have the geographical advantage of being close to the regulators and inter- mediaries but also have the advantage of developed transportation infrastructure, mak- ing it easier for the local companies to reach them and agree with them, finally reducing the listing cost of the company and increasing the approval probability of listing. On the contrary, if companies are far from intermediaries, regulators and institutional investors, or transportation is inconvenient, communication costs will be more expensive. Then, it will be difficult for the company to obtain the support and understanding from them, thereby increasing the cost of listing and the risk of being denied. As a developing country in transition, China’s transportation infrastructure construction fell far behind most developed countries until the end of the last century. Since the 1990s, China has accelerated the pace of transportation infrastructure construction, of which the construction of high-speed railway (HSR) is the most remarkable. In 2008, China officially opened the Beijing–Tianjin intercity high-speed railway. By the end of 2017, China has built the world’s largest ‘four verticals and four horizontals’ high-speed rail network and con- tinues to build the ‘eight vertical and eight horizontal’ high-speed rail network with comprehensive coverage for the central and western regions. China’s high-speed rail construction starts from the four first-tier cities as well as other large cities, and gradually extends to other small and medium-sized cities. In other words, with the construction of high-speed rail, the improvement of transportation infrastructure makes the accessibility between local companies and regulators, intermediaries and institutional investors better, helping to reduce the cost of information access between each other. This effect is particularly pronounced in cities where transport infrastructure is relatively poor. Exploiting the opening of China’s high-speed rail as the natural experiment and using the 2004–2017 company listing application as the experimental scenario, we apply the difference-in-differences (DID) model to investigate the impact of the opening of high- The reasons for the unbalanced distribution of listed companies in China are quite complex and cannot be determined solely by geographical factors, but the geographical factors described here are at least an important reason that cannot be ignored. 274 Z. JIN, ET AL. speed rail on the number of local companies applying for listing, company’s approval probability of listing and the quality of the application company. We find that more local companies apply for listing after the opening of high-speed rail in one city compared with other cities that have not yet opened the high-speed rail, which is more pronounced in cities beyond the three major city groups (Pearl River Delta, Yangtze River Delta and Beijing-Tianjin-Hebei), cities whose HSR can go directly to Beijing, Shanghai, Guangzhou and Shenzhen, and cities without an airport. Furthermore, we find that the opening of high-speed rail reduces the cost for intermediaries and venture capitalists to have access to company information, making it easier for companies to obtain venture capital parti- cipation and hire high-quality intermediaries, thus enhancing the motivation and increase the approval probability of company going public. Our results also show that the opening of the high-speed rail reduces the cost for regulators, investors and intermediaries to obtain information from the applicants, allowing them to select higher-quality applicants and reducing the cost of financing when they go public. Our research indicates that the improvement of transportation infrastructure increases the motivation and the approval probability of IPO application for local companies. The main contributions of this paper are as follows. First, the research on the listing of the company mainly focuses on the Post-IPO market performance, such as IPO under- pricing (e.g. Allen & Faulhaber, 1989; Huang et al., 2016; Ljungqvist, 2007, etc.). These papers mainly examine how information asymmetry of investors in the secondary market affects resource allocation. The literature on the factors of approval probability of IPO application mainly examines how company’s political connection (Cai et al., 2013;Zhang et al., 2012), social relationship of intermediaries (Chen et al., 2014; Dai et al., 2014; Du et al., 2013; Li & Liu, 2012), and venture capital participation (Shen et al., 2013; Zeng et al., 2016) help companies to go public successfully, aimed at investigating the impact of software environment. We examine how the improvement of hardware environment, such as transportation infrastructure, can help local companies access capital market resources to uncover the impact of the hardware environment on capital market resource allocation. Based on the primary market participants, this paper enriches the existing literature on the company’s going public from the perspective of hardware environment. Second, some literature applies the relevant theory of new economic geography to investigate the influence of distance on the behaviour of companies. Initially, these studies focus on how the actual distance between the company and the relevant entities affects the behaviour of stakeholders. For example, Coval and Moskowitz (2001), Malloy (2005), Kedia and Rajgopal (2011), and Choi et al. (2012), respectively, look at how distance affects the behaviour of investors, analysts, regulators, and auditors. However, scholars gradually find that the study of the impact of geographical distance on the company’s economic behaviour faces some endogeneity problems. The airline and the opening of high-speed rail compress the space-time distance, which can be regarded as a substitute for distance and an exogenous shock of distance change, finally effectively making up for the defects of geographical distance. Some literature has examined the role of geogra- phical distance in the company’s economic behaviour from the perspective of airlines or The market environment contains two aspects: software environment and hardware environment. Software environ- ment refers to culture, system and social capital, etc., while the hardware environment is based on the actual conditions of transportation infrastructure, industrial plants and commercial entities. CHINA JOURNAL OF ACCOUNTING STUDIES 275 high-speed rail. For example, Giroud (2013), Chemmanur et al. (2014) and Bernstein et al. (2016) use opening airline as an external variable, respectively, to examine its impact on parent-subsidiary investment, corporate mergers and acquisitions, and VC investment; Huang et al. (2016), Long et al. (2017), and Zhao et al. (2018), respectively, examine the impact of the opening of high-speed rail on the company’s IPO underpricing, VC invest- ment and stock price crash. This paper takes the opening of China’s high-speed rail as the natural experiment, and examines how the improvement of transportation infrastructure affects the company’s financing behaviour to reveal how the company’s hardware envir- onment affects its financing capacity in the capital market, enriching the literature on new economic geography. Third, existing research shows that improvements in transportation infrastructure can boost economic growth (Liu & Li, 2017; Zhang, 2017; Zhou & Zheng, 2012), while economic growth depends on the economic benefits of micro-enterprises. By verifying that the opening of high-speed rail can improve the financing efficiency of local companies in the capital market, this paper reveals an important mechanism for transportation infrastructure to promote economic growth from the micro-level of the company. The rest of the paper is organised as follows: We introduce the institutional back- ground and develop hypothesis in the second part. The third part is the research design. The fourth part examines how the launch of HSR affects the behaviour and outcomes of company’s going public. Finally, the fifth part concludes. 2. Institutional background and theory analysis 2.1. Institutional background 2.1.1. Institutional background of HSR China’s high-speed rail construction is mainly to meet economic development and the movement of people. On the whole, the construction of China’s high-speed railway follows the order from big cities to medium and small cities, from the economically developed eastern coastal areas to the inland areas of the central and western regions. The Beijing–Tianjin intercity high-speed railway, which opened in 2008, is 120 km long and designed to travel at 350 km per hour, reducing the travel time between Beijing and Tianjin from 2 hours to about 30 minutes. In 2011, the Beijing–Shanghai high-speed railway reduced the travel time between Beijing and Shanghai from the original 10 hours to less than 5 hours, greatly compressing the space-time distance and improving the mobility of city people. Regionally, by the end of 2011, 43 cities had opened high- speed rail in the eastern region, while the number of HSR cities is only 26 in the central and western regions, lagging far behind the eastern region. By the end of 2018, 222 cities across the country had opened high-speed rail, including 89 cities in the eastern region, 75 in the central region and 58 in the western region. China’s high-speed railway has a business mileage of 29,000 km, covering 23 provinces. China has the world’s longest high-speed rail mileage and the highest transport density, and the total mileage of high- speed rail accounts for two-thirds of the world’s total high-speed rail mileage. Data source: https://www.sohu.com/a/285874760_656927. 276 Z. JIN, ET AL. 2.1.2. Institutional background of IPO On 1 February 2004, the CSRC issued the Interim Measures for the Sponsorship System for the Listing of Securities, which formally stipulated that the sponsor system of new shares issue began to be implemented, and the sponsor shall be responsible for recommending qualified companies. Specifically, the sponsor institution and its sponsor representative are responsible for recommending the proposed listed company to the CSRC and provid- ing pre-listing counselling to the company. To this end, the sponsor needs to do due diligence on the company applying for listing, make its corporate governance structure meet the requirements of the listing specification, and pre-verify the authenticity, accu- racy and completeness of the application materials. After the successful listing of the company, the sponsor and its sponsor representative still have the responsibility to conduct continuous supervision of the company it recommends for a period of time, and bear legal responsibility for the non-standard behaviour of the recommended com- pany throughout the period of coaching and supervision. Finally, the CSRC reviews the listing information of the applicant company endorsed by the sponsor to determine whether the company has met the listing conditions. Under the sponsor system, in order to guide the company to meet the requirements of the listing norms, the sponsor needs to conduct company site visits many times and, if necessary, stays in the proposed company for counselling and research for a long time. The recommendation system requires intermediaries such as brokers and auditors to play a greater role in stock issuance, and also increases their corresponding legal risks. Therefore, they also need to go to the company for information acquisition many times. As the final auditor, the CSRC will conduct many company site visits in the final stage to obtain more adequate or accurate information to determine whether the company is eligible for listing financing. Therefore, whether it is regulators, brokers, auditors, or primary market investors (private equity institutions and venture capital institutions) have the incentive to obtain more adequate and accurate information of the company. 2.2. Theory analysis Based on the above-mentioned institutional background, both the motivation of the company to apply for listing and the approval probability of company application are closely related to the intermediary, regulator and investors’ understanding of the company. Less information asymmetry between companies and regulators can help regulators judge whether a company can go public more accurately, reducing the risk of accountability on the regulators themselves. Therefore, if the regulator has a higher cost of obtaining information about a company, they will have a higher risk perception of the company and then deny the IPO approval. From the broker’s point of view, the more adequate and accurate information the broker has obtained from the company, the better they can guide the company to meet the requirements of listing norms, so are other intermediaries. From the company’s perspective, the lower the cost of obtaining its information is, the lower the cost of applying for listing, and the higher the approval probability of application is, prompting the company to be more willing to submit a listing application. Therefore, if the first problem for the company to go public to finance is the information asymmetry between the company and the external stakeholders, which can be solved by reducing the cost of information users to obtain information. CHINA JOURNAL OF ACCOUNTING STUDIES 277 From the information provider’s perspective, companies can reduce information asymmetry by increasing public disclosure. From the point of view of information needers, external stakeholders can obtain private information from the company through information search and site visits. According to research by Ball et al. (2003), Fan and Wong (2002), and Wong (2016), in emerging markets in East Asia, the quality of public information disclosure by listed companies is generally low, and external stake- holders usually obtain company information through private communication. Meanwhile, companies that apply for listing disclose far less public information than listed companies. Moreover, the applicant company has a stronger incentive to manip- ulate earnings to meet listing requirements (Chen & Yuan, 2004; Lin & Wei, 2000), so it is more necessary to obtain information through private communication. Private commu- nication can be made by voice or video through communication tools, as well as by face- to-face site visits. Cheng et al. (2019) and Han et al. (2018) show that site visits are more effective than public disclosure channels and telephone or video communication in obtaining private information, because ‘hard information’ such as financial indicators can be obtained through public information disclosure and telephone communication. But it is difficult to obtain ‘soft information’ such as corporate culture, human capital and business environment (Petersen & Rajan, 2002). The judgement of company value depends on both hard information and soft information. Site visits are the primary way to obtain soft information about the company (Long et al., 2017; Stein, 2002), and by which the authenticity of hard informa- tion can be confirmed. Chen and Yuan (2004), Lin and Wei (2000) find that the fraud of hard information such as financial data in the process of applying for listing by Chinese companies makes it particularly important for external stakeholders to obtain soft information through site visits. The efficiency of site visits depends on the facilitation of transport infrastructure. The opening of high-speed rail in the city where a company is located, by compressing the space-time distance, can improve the efficiency of company site visits by external stakeholders, reduce the cost of company information acquisition, and finally reduce the information asymmetry between the company and external stakeholders. The convenience brought about by the opening of the high- speed rail can not only enable a wider range of intermediaries such as sponsors, audit firms and law firms to provide services to the company, but also make regulators more willing to understand the company, which enhance the company’s motivation to submit a listing application. Although understanding does not mean the company can neces- sarily be recognised, understanding is a precondition. Because the opening of high- speed rail makes it easier for companies to get pre-IPO guidance from intermediaries, and better understanding by regulators, caeteris paribus, the opening of high-speed rail can increase the approval probability of company application. The above analysis leads to the following hypothesis: Hypothesis 1. Caeteris paribus, after a city launches a HSR route, the number of compa- nies applying for listing will increase significantly in the city and the approval probability of company application will also increase significantly. Soft information refers to the unique information that is difficult to be recorded, stored or transmitted. It is a kind of non- standard information and ‘oral information’ (Liu & Zhu, 2015; Petersen & Rajan, 2002). 278 Z. JIN, ET AL. 3. Research design 3.1. Empirical model According to the Medium- and Long-Term Railway Network Plan, China’s railway autho- rities have planned a high-speed rail network across the country. China’s high-speed rail construction presents a regional look: Not every region has opened high-speed rail, and the opening time of high-speed rail in each region is not the same, which provides us an opportunity to rely on the launch of high-speed railway (HSR) service in China as a natural experiment to examine how geographical distance affects firms’ IPO activity. Following Atanassov (2013), Bertrand et al. (2004) and Imbens and Wooldridge (2009), we estimate a differences-in-differences regression model: IPONUM ¼ β þ β POST þ β GDP þ β GDP PER þ β PEOPLE i;tþ1 i;t i;t i;t i;t 0 1 2 3 4 X X (1) þ β AIRPORT þ β GENTI þ CITY þ YEARþ ε i;t i;t i;tþ1 5 6 where i indexes cities, t indexes years, the dependent variable IPONUM equals the i,t+1 number of firms applying for IPOs in year t + 1 in city i, Post is a dummy variable that i,t equals one if the HSR service is available by year t in city i, control variables include GDP, GDP_PER, People and so on, and more detailed variable definitions are in Table 1, and ε i,t+1 is an error term. This methodology can better control for the fixed differences between the treated group and the control group via the city-fixed effects. The year dummies control for aggregate fluctuations. Next, this paper will examine how the opening of high-speed rail affects the company’s listing application. Following Chan et al. (2012), Chu and Fang (2016), we estimate the following differences-in-differences Logit regression model: PASS ¼ β þ β TRAIN þ β POST þ β SIZE þ β LEV þ β WXRATIO i;tþ1 i t i;t i;t i;t 0 1 2 3 4 5 þ β TATR þ β M GROWTH þ β MEANROE þ β MEANEI i;t i;t i;t i;t 6 7 8 9 (2) þ β MEANCASH þ β BIG4 þ β RANK þ β OTHER þ β SOE i;t i;t i;t i;t i;t 10 11 12 13 14 X X þ β AIRPORT þ β G GROWTH þ INDUSTRY þ YEARþ ε i;t i;t i;tþ1 15 16 where i indexes firms, t indexes years, the dependent variable PASS is a dummy variable i,t that equals one if IPO application of firm i is approved by CSRC in year t + 1, POST is i,t a dummy variable that equals one for firm i in year t after the launch of an HSR route to a city where firm i is located, TRAIN is a dummy variable that equals one for firm i in any year if an HSR route is launched in a city where firm i is located, and ε is an error i,t+1 term. Following prior literature (Dai et al., 2014; Li & Liu, 2012; Zeng et al., 2016), we control some variables of firm characteristics, such as firm size (SIZE), financial leverage (LEV), intangible assets ratio (WXRATIO) and so on, and more detailed variable definitions are in Table 1. Industry and year fixed effects are also controlled in the regression model (2) by industry and year dummies. 3.2. Data and sample We obtain data on HSR sites from China Railway website (www.china-railway.com.cn), and manually collect the earliest date when an HSR route was launched in each city. CHINA JOURNAL OF ACCOUNTING STUDIES 279 Table 1. Variable definitions. Variables Definition IPONUM The number of firms applying for IPOs. LNIPONUM The natural logarithm of one plus IPONUM. PASS A dummy variable that equals one if IPO application of a firm is approved by CSRC, and 0 otherwise. TRAIN A dummy variable that equals one for a firm in any year if a HSR route is launched in the city where it is located, and 0 otherwise. POST A dummy variable that equals one after a HSR route is launched in a city, and 0 otherwise. POST2 A dummy variable that equals one for a firm after the HSR opening of the second year in the city where it is located, and 0 otherwise. POST3 A dummy variable that equals one for a firm after the HSR opening of the third year in the city where it is located, and 0 otherwise. ROA Net income divided by total assets at the end of year. GROWTH One-year percentage growth in sales. UNDERPRICING (first-day closing price of post-IPO – IPO offer price)/IPO offer price. VOLATILITY Standard deviation on the daily return of stocks in the first year following firm’s IPO. VC A dummy variable that equals one for a firm if at least a venture capital (VC) is one of the top ten shareholders when the firm applies for listing and 0 otherwise. RELAT A dummy variable that equals one for a firm if at least one employee of underwriters or audit firms have ever served as a member of the issuance examination committee, and 0 otherwise. 0 1 DROA /DROA ROA in the year prior to the IPO minus ROA in the IPO year or in the first year after the IPO and a larger value means a larger decline in profitability. BH12 Market-adjusted 12 months stock return: � ðmonthly adjusted return þ 1Þ