Financial Management Practices and Financial Performance in China’s Main Capital Markets: A Macroeconomics Moderation Analysis

Abstract

This study investigated the moderating role of interest rate (IR) and inflation (INF) in the association between financial management practices (FMPs) and financial performance of non-financial companies listed on China’s Shanghai and Shenzhen stock exchanges. Espousing a mixed-methods approach, with quasi-experimental design, grounded in pragmatism, it analysed financial data from 3,689 companies (2010–2019) and interviews, utilising two-step system generalised method of moments, effectively addressing endogeneity and other econometric issues, yielding 36,890 balanced-panel, firm-year observations. Fixed effects and random effects were employed to handle unobserved heterogeneity and guarantee robustness. Findings indicated that, whilst total-debt-to-total-assets ratio and dividend yield significantly and negatively influenced firm financial performance (FFP), total-equity-to-assets-ratio, cash conversion cycle, current ratio, total assets turnover, tangibility, dividend payout ratio, firm size and firm age significantly and positively impacted FFP. These associations were complementarily moderated/strengthened by IR and INF, emphasising the risks of high-borrowing costs for highly-geared companies and stressing the necessity for corporate deleveraging and optimal capital structures. Managers are admonished to engage in diversified projects with positive net present value to guarantee constant cash flows and sustainable dividend payments. Whilst the study’s framework is Chinese-oriented, it is replicable in similar developing economies. It incorporates prior unexploited FMP metrics into the resource-based view theory, extending the theory’s scope, making it more rigorous, robust and generalisable.