Cash Flow Predictability and Firm Volatility: Evidence from China’s Export Tax Rebate Reform

This paper examines how cash flow predictability affects volatility and be- havior among small firms. I exploit China’s 2006Export Tax Rebate reform, which decentralized approval authority from municipal to county-level tax bureaus and transformed uncertain, multi-month payment delays into trans-parent processes with rebates delivered within days. Using a geographic re-gression discontinuity design that compares firms located in adjacent towns across policy boundaries, I find that improved cash flow predictability re-duces sales growth volatility by approximately 19 percent. The results show that small firms respond to predictable cash flows not by expanding scale, but by adopting more conservative operating strate-gies. Treated firms increase cash-to-asset ratios, raise wages, and reduce fixed investment, indicating a shift toward liquidity buffering and workforce retention rather than capital expansion. Employment volatility and job de-struction also decline, suggesting that predictable cash flows enable firms to sustain ongoing commitments and stabilize operations. At the regional level, improved cash flow predictability intensifies com-petition. Profit margins fall and new firm entry declines, consistent with stronger incumbents raising operational standards and increasing barriers to entry. These findings highlight cash flow predictability as a distinct and economically important dimension of financial constraints for small firms. The results have direct implications for policies aimed at improving pay-ment practices, suggesting that predictable payment timing can enhance firm stability while reshaping market dynamics.