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Firms’ COVID-19 Pandemic Exposure and Corporate Cash Policy: Evidence from China

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  • He, Zhongda
  • Suardi, Sandy
  • Wang, Kai
  • Zhao, Yang

Abstract

The COVID-19 pandemic adversely impacted economic activity, decreased corporate revenues, and magnified cash flow fluctuations. We study how Chinese listed firms' COVID exposure influences their cash holdings. A firm's COVID exposure is measured by its excess stock return responses to globally newly infected cases while controlling for market return. Firms increase (decrease) cash balances when their stock returns fall (increase) with COVID severity due to precautionary motives. Firms cannot predict the evolution of the pandemic, which impacts demand and supply and the cash conversion cycle. The deteriorating business condition also increases external financing costs with non-state-owned, low-growth, small, and firms without overseas businesses facing higher financial frictions. Furthermore, firms with good corporate governance tend to pre-empt operational uncertainty by increasing cash holdings. The increased cash holdings translate to more R&D expenditure but lesser capital investment. Our results remain robust to placebo tests, using excess cash and alternative COVID exposure measures.

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  • He, Zhongda & Suardi, Sandy & Wang, Kai & Zhao, Yang, 2022. "Firms’ COVID-19 Pandemic Exposure and Corporate Cash Policy: Evidence from China," Economic Modelling, Elsevier, vol. 116(C).
    • Handle: RePEc:eee:ecmode:v:116:y:2022:i:c:s0264999322002401
    DOI: 10.1016/j.econmod.2022.105999
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    1. Chung, Hae Jin & Jhang, Hogyu & Ryu, Doojin, 2023. "Impacts of COVID-19 pandemic on corporate cash holdings: Evidence from Korea," Emerging Markets Review, Elsevier, vol. 56(C).

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    More about this item

    Keywords

    Firms' COVID exposure; Cash holding; Excess cash; Financing friction; Corporate governance;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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