Stock market liberalisation and corporate cash holdings: evidence from China

Using China's staggered Mainland-Hong Kong Stock Connect programs (hereafter, Connect programs) as quasi-natural experiments, we examine the impact of stock market liberalisation on corporate cash holdings. We find that the average cash holdings of the affected Chinese A-share listed firms decreased significantly after the launch of the Connect programs. Further tests show that the relaxed financial constraints and the improved information environment are two plausible channels that allow stock market liberalisation to reduce corporate cash holdings. Overall, we offer original evidence showing how stock market liberalisation in emerging economies affects firms' liquidity management decisions.