Environmental performance and corporate cash holdings

ABSTRACT

This study examines the impact of environmental performance on corporate cash holdings. Following Cho and Patten (2007), we use ratings of bad environmental activities (i.e. environmental concerns) as the proxy for environmental performance. We rely on the agency motive of corporate cash holdings to predict a negative relation between environmental concerns and the level of cash. Using a 24-year panel sample with 22,724 observations representing 2,787 unique firms, we find that firms with worse environmental performance hold less cash, supporting the agency motive. Our results still hold after a battery of additional tests.

KEYWORDS:

• Environmental performance
• environmental concerns
• corporate cash holdings
• agency motive

JEL CLASSIFICATION:

• G30
• G39
• M1

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ We obtain data on environmental concerns from the Morgan Stanley Capital International’s Environmental, Social, and Governance database.

² We perform a battery of additional tests including alternative sample periods, changes analysis, two-stage ordinary least squares regression analysis (2SLS), lag measures of environmental concerns, and alternative measures of environmental concerns. We still obtain consistent results, which indicates that our primary findings are robust. Results of the additional tests are not tabulated due to brevity.