The impact of supply chain finance on firm cash holdings: Evidence from China

We establish a link between supply chain finance (SCF) and a firm's cash holdings through a proprietary dataset of listed firms on the Shanghai and Shenzhen Stock Exchanges. Our findings suggest that SCF may significantly improve cash holdings by a core firm, speed up its cash turnover, and enhance its competitiveness. Such impacts are stronger when the firm is of lower efficiency. In addition, a firm with more commercial credit or of state ownership is more likely to become committed to SCF. A close relationship with banks or political connections may further improve the private firm's cash holdings. In the meantime, increased cash holdings at the core firm may lead to enhanced investment efficiency, rather than over-investment, and enhanced firm values. Our findings may have such policy implications that SCF needs to be better supported by the banking sector and the government for China's sustainable economic success.