The effect of air pollution on cash holdings and financial leverage

Purpose The purpose of this paper is to investigate whether air pollution has significant impact on corporate cash holdings and financial leverage. Design/methodology/approach The data of 199 firms listed on Istanbul Stock Exchange during the period 2009–2020 is analyzed by using pooled ordinary least squares and two-step system generalized method of moments models. Findings The results indicate that firms in regions with high air pollution tend to increase cash level. In addition, the positive effect of air pollution on cash level is stronger and more significant for environmentally sensitive firms and firms with low operational and distress risk. The results also show insignificant effect of air pollution on financial leverage. Practical implications Firms in regions with high air pollution should conduct proactive environmental protection procedures and enhance their eco-efficiency instead of holding excess cash that could negatively affect financial performance. In this context, policymakers should provide financial facilities to firms located in regions with high air pollution and that have low ability to finance environmental investments. On the other hand, the environmental laws and regulations introduced by regulatory authorities can enhance the economic development and firm performance by decreasing the adverse influences of air pollution on corporate financial policies. Originality/value To the best of the author’s knowledge, this research is one of few that examines the impact of air pollution on corporate cash holdings and financial leverage in emerging markets.