What drives institutional investors' site visit decisions: The role of local business environment in China

Corporate site visits are crucial for information discovery, forecasting prospective earnings, and enhancing market liquidity, investment efficiency, and financial performance. However, the factors influencing investors' decisions to conduct corporate site visits remain unclear. Leveraging detailed records of institutional investors' site visits to 3154 listed Chinese firms from 2013 to 2021, we demonstrate that a favorable local business environment positively correlates with the frequency and scope of these visits. This relationship arises from reduced information costs and enhanced returns for investors, particularly benefiting firms with lower market synchronicity, higher agency costs, fewer financial constraints, higher cash reserves, and lower dividend payout ratios. Additionally, employing a difference-in-differences research design with interest rate liberalization as an exogenous shock helps mitigate endogeneity concerns, reinforcing the robustness of our conclusions. Furthermore, We find that the interaction between the local financial environment and institutional investors' site visits significantly improves corporate investment efficiency and mitigates both overinvestment and underinvestment issues. Overall, our findings underscore the critical role of local business environment development in shaping institutional investors' site visit patterns and their complex interplay with firm-specific attributes.