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

Zhongda He; Sandy Suardi; Kai Wang; Yang Zhao

doi:10.1016/j.econmod.2022.105999

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

Econ Model. 2022 Nov:116:105999. doi: 10.1016/j.econmod.2022.105999. Epub 2022 Aug 21.

Authors

Zhongda He¹, Sandy Suardi², Kai Wang³, Yang Zhao³

Affiliations

¹ Newhuadu Business School, Minjiang University, 200 Xiyuangong Road, Fuzhou, Fujian, 350108, China.
² School of Business, University of Wollongong, Northfields Ave, Wollongong, NSW, 2522, Australia.
³ Chinese Academy of Finance and Development, Central University of Finance and Economics, 39 South College Road, Haidian, Beijing, 100081, China.

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.

Keywords: Cash holding; Corporate governance; Excess cash; Financing friction; Firms' COVID exposure.