Creditor protection shocks and corporate cash holdings: Insights from online judicial auctions

Abstract

This study examines the influence of creditor protection on corporate cash holdings using the staggered implementation of Online Judicial Auctions (OJAs) in China as a quasi-natural experiment. OJAs strengthen creditors' rights to recover their claims and thus enhance creditor protection. Using a stacked sample of Chinese-listed corporates, we find that corporate cash holdings decrease significantly after OJAs are introduced. This effect is primarily driven by increased bank credit supply and improved access to corporate credit, which mitigates the precautionary demand for cash. The reduction is more pronounced among corporates in the growth stage, and those in regions with higher OJAs participation, weaker bank competition, and less favorable legal environments. These findings suggest that OJAs help reinforce credit resource allocation and improve the efficiency of legal enforcement. Furthermore, OJAs can stimulate corporates’ real investments and lower financial risks. Overall, our results underscore the critical role of creditor protection in shaping corporate cash management strategies and shed light on the value of advancing the digitalization of judicial enforcement.