From liquid reserves to contracts: the impact of government procurement on corporate cash holdings

This study examines the impact of government procurement on corporate cash holdings of Chinese listed firms. We find that government contracts are significantly negatively associated with corporate cash reserves, primarily through reduced earnings uncertainty and improved access to credit. This association is more pronounced among firms with lower asset pledgeability, tighter financial constraints, non-state ownership, and repeated government contract awards. Furthermore, we observe a remarkable decline in the cash holdings of suppliers after the implementation of stricter regulations on unpaid government accounts in 2018. Our findings also suggest that government procurement promotes higher spending on capital investments, research and development (R&D), and the recruitment of R&D-related employees, while concurrently decreasing the marginal value of cash holdings. These results highlight the stabilising role of government procurement in emerging markets, indicating its potential to mitigate firms’ precautionary incentives for holding cash.