You can share a CD over AppleTalk, from any machine with File Sharing turned on and with full privileges set for the user in question, and yes, as has been reported, you can install a system from a CD mounted over a network, assuming you can boot the target machine with a lower system version or with a Network Access floppy. Booting from another hard drive would presumably work for a network installation, too. I am a little surprised that this is not common knowledge.
I have found, mind you, that a CD popped in my A/UX - AppleShare Pro Q950 has to be explicitly shared in the server software before it will appear on the network. Personal File Sharing from other machines is less particular, it would seem, as all you need do is put the CD in the machine and bingo, there it is on the list of networked drives running on the fileserver in question.
I too have installed 8.5 on a PB2300c over LocalTalk, though I then upgraded to 8.6. It took ages, but the installation worked flawlessly. MacOS 8.6 runs surprisingly well on the thing, and from a CF drive at that, though with Speed Doubler installed and with many of the bells & whistles turned off/ USB support etc. disabled.
Mind you, I do have 56MB of RAM in it. YMMV with lower specs.
I'd be interested to know if the solution proposed worked for the owner of the PB1400.