Environmental regulations and corporate cash holdings

Abstract

The impact of environmental regulations on corporate performance and decisions has attracted significant attention from academics, practitioners and policymakers. We extend this line of research to examine the impact of regional environmental regulations on firms’ cash holdings. We find that environmental regulations motivate firms to increase cash holdings. Further analyses reveal that firms increase cash holdings due to having less debt financing, decreased sales and more green innovation, all caused by environmental regulations. Under regulatory pressure, firms operating in more competitive industries, facing more financial constraints, having more environmental expenditure and belonging to the secondary sector tend to hold more cash than other firms, while firms with better CSR performance do not maintain as high cash holdings as their counterparts. We further demonstrate that increased cash holdings caused by the imposition of environmental regulations increase firm value.