Using a panel of Chinese listed firms over the period 1998–2015, we examine the extent to which liquidity impacts firms' acquisition decisions, method of payment choice, and performance following mergers. We observe that cash-rich firms are more likely to attempt acquisitions, especially if they are subject to tunneling. Next, we find that bidders with higher growth opportunities are less likely to use cash payments in acquisitions. This effect is stronger for financially constrained bidders, who face greater opportunity costs of holding cash. Our last set of results highlights the under-performance of cash acquisitions in both the short and long term. •We document the effect of liquidity on Chinese firms' acquisition decisions.•Tunneling is a motivation for cash-rich firms to make acquisitions.•Greater growth prospects reduce bidders' willingness to use cash payments.•This is true especially for financially constrained firms.•Cash acquisitions underperform stock acquisitions in both the short and long term.