High-speed rail, small city, and cost of debt: Firm-level evidence

This study examines the causal effects of high-speed rail (HSR) on the cost of debt (COD) of listed firms in China's stock markets. Although transportation infrastructure may reshape business activities, little we know whether firms located in large metropolises and small peripheral cities enjoy the same convenience in terms of debt financing. To evaluate the distributional impact of HSR on COD, we exploit a quasi-experiment of variation in China's HSR and employ difference-in-differences estimation to show the following results. (1) The HSR connection substantially increases the COD of firms located in non-node cities by 2.2%. (2) To address endogeneity, we introduce a placebo test and instrumental variable based on the hypothetical least-cost HSR networks, and results are highly consistent. (3) A plausible mechanism is that firms in peripheral cities with HSR connections face increasing competition from the product market and the credit market. (4) The preceding effect is particularly pronounced for firms with small size, firms operating in highly competitive industries, firms from the service industries, and firms located in the eastern economic zone of China. Overall, we provide the first empirical evidence that although HSR provides convenience to transportation and information delivery, firms located in peripheral cities may bear increased financing cost.