Firm Size, Industry and Liquidity in a Crisis: Evidence from A-share Chinese Corporations

We investigate the drivers of firm liquidity in the world’s largest emerging economy and around the last global financial crisis cycle. Using data from 654 Shanghai Stock Exchange-listed Chinese firms across 12 industries over the period 2007-2012; we particularly focus on industry and size effects. Small and medium sized firms dramatically increase cash holdings during periods of economic crisis, and although large firms on average increase their holdings as well, they do so at a slower pace. We find that the trade-off, pecking order and agency theories are relevant and applicable to the Chinese context. However, given the lax regulatory environment in which the firms operate, corporate governance factors are found to be weak explanatory factors for cash holding behaviour. We also document several significant industry and size-based dynamics relating to the studied determinants of firm cash holding behaviour. The results obtained are robust to alternative definitions of firm liquidity. Overall, the results point to both consistencies with and clear deviations from existing knowledge on firm cash holding behaviour.