Holding cash for corruption? Evidence from China's anti-corruption campaign

Exploiting China's anti-corruption campaign in 2012 as a quasi-natural experiment, we find that firms with higher prior entertainment and travel costs (ETC), a proxy for corruption, decrease cash holdings more because of the campaign. We further observe a greater decline in cash values for more corrupt firms. Moreover, the baseline pattern is more pronounced in financially constrained, better-governed, and private enterprises. We also rule out possible confounders concerning firms' financing conditions and investment decisions. Overall, the evidence favours the liquidity hypothesis that firms demand less cash as they anticipate fewer corrupt opportunities in the business environment in the post-campaign era.