Corporate Liquidity Risk: A Case Study on the Evergrande Group in China

Abstract

Purpose - Given that China Evergrande Group has recently been caught in a liquidity risk, the purpose of this study is to identify and assess its liquidity using traditional financial indexes. We analyze the reasons for the liquidity risk exposures, so as to provide practical implications for real estate companies.
 Design/Methodology/Approach - This study combines the principal-agent and the trade-off theories in order to analyze China Evergrande Group’s exposure to liquidity risk under the leverage effect. In addition, China Evergrande Group’s financial position is analyzed in depth, and its liquidity risk is defined and identified.
 Findings - The results show that under the high leverage effect, the company suffers from a high liquidity risk, and eventually falls into a financial crisis due to the shortage of cash for short-term debt accumulated in previous periods, and the long delay in returns on property sales.
 Research Implications - This study provides a new perspective for debt research by examining the leverage and liquidity risk of real estate-related enterprises. During the golden era of the real estate industry, real estate enterprises should uphold the principle of moderation in debt management, make reasonable use of financial leverage, clarify the strategic goal of diversification, and avoid credit risk.