Bank Branches Expansion and Corporate Cash Holdings: Evidence from the Distribution of Bank Branches in China

Using the geographical distribution data of banks' physical branches at micro-firm level, this paper investigates the impact of bank branches expansion on corporate cash holdings. We find that the more the number of bank branches around firms, the less corporate cash holdings, implying that bank branches expansion helps reduce the level of corporate cash holdings. And the negative effect is more prominent in small-sized firms and non-SOEs. Further mechanism tests show that bank branches expansion reduces cash holdings mainly through intensified bank competition and shortening the geographical distance between bank and firm. We also find that bank branches expansion speeds up the dynamic adjustment to the target level of corporate cash holdings and mitigates agency problems. Our study highlights the crucial role played by the geographical distribution of bank branches in shaping corporate financial decisions and provides important policy implications for banking sector reform.