Central bank digital currency and corporate cash holdings: Evidence from China's e-CNY pilot

Abstract

We examine the impact of a central bank digital currency (CBDC) on corporate cash holding decisions, utilizing China's staggered e-CNY pilot program as a quasi-natural experiment. Our findings demonstrate that firms operating in pilot areas significantly decrease their cash holdings following the introduction of e-CNY. Mechanism tests indicate that e-CNY serves as a novel governance mechanism that reduces firm agency costs, thereby diminishing agency motives for cash hoarding. It also acts as a powerful surveillance tool that leads to greater government subsidies, broader access to bank loans, and lower debt financing costs, thus reducing precautionary and transactional motives for holding cash. Additionally, dynamic tests suggest that e-CNY increases firms' cash adjustment speed. This study provides initial evidence that CBDCs, through their inherent characteristics of transparency, traceability, immutability, and programmability, can mitigate agency problems, reduce information asymmetry, and enhance economic transparency. However, this may also raise concerns about privacy and government overreach that require further study.