Nº 20-16: On-Site Inspecting Zombie Lending

Using the introduction of high-speed rail as exogenous shocks to costs of information acquisition, we show that reductions in information-acquisition costs lead to a significant increase in information production and improvement in output quality, evidenced by higher frequency of analysts visiting portfolio firms, and higher forecast accuracy. We further find that information production represents the channel through which acquisition costs affect output quality. We corroborate these findings using a large-scale survey of financial analysts. More information production is also associated with improved price efficiency. Finally, both the empirical and survey results highlight the importance of soft information in analysts’ information production.