Climate change and corporate cash holdings: Global evidence

Abstract

Using data from 41 countries, we provide novel empirical evidence that firms’ cash holdings are positively associated with their climate change exposure. This evidence is robust to different model specifications and survives a battery of tests to ease concerns related to spurious correlation and omitted variable bias. Using the release of the Stern Review as an exogenous shock to climate change awareness, we show that this association becomes significantly stronger after the release of the Review and particularly so for firms with higher exposure to regulatory and transition risk dimensions of climate change as well as financially constrained firms. Overall, results fit consistently within the precautionary motive framework and suggest that firms hold more cash to safeguard against the adverse impact of climate change.

Firm‐Level Climate Change Risk and CEO Equity Incentives

“…incentive given CCR is significantly stronger for the socially responsible firms than their counterparts. Second, we consider an essential factor that numerous negative impacts of climate risk could also lead the corporations to a reputational crisis that escalates higher environmental litigation risk (Atanasova and Schwartz, 2020;Bolton and Kacperczyk, 2021;Chang et al, 2021;Delis, de Greiff and Ongena, 2020;Fard, Javadi and Kim, 2020;Javadi et al, 2022). We consistently find that firms operating in industries with higher susceptibility towards environmental litigation adopt higher-level CEO equity incentives.…”

“…Third, the extant literature documents that climate change exacerbates the creation of stranded assets via regulatory and transition risks due to CCR, which is an added challenge to corporate illiquidity of productive capital (e.g. Atansova and Schwartz, 2020;Bolton and Kacperczyk, 2021;Delis, de Greiff and Ongena, 2020;Javadi et al, 2022). However, this is less of an issue for firms in high-tech industries as they have fewer tangible assets to be affected.…”

“…The Stern Review, the result of a UK Government-sponsored project and exceeding 700 pages long, is generally hailed as the 1406 Hossain et al first comprehensive and detailed economic analysis providing an in-depth analysis of the devastating impact climate change will have on the global economy (Painter, 2020;Stern, 2008). It is not at all far-fetched to predict that investors and regulators would become more aware of climate risks that firms face in the post-Stern world (Javadi and Masum, 2021;Javadi et al, 2022;Painter, 2020). This puts more pressure on firms and their leadership to tackle such risk.…”

“…High-tech vs non-high-tech firms. Another important reason for corporations to consider CCR seriously is that it often creates stranded assets that are most likely to make productive capital largely illiquid (Atansova and Schwartz, 2020;Delis, de Greiff and Ongena, 2020;Javadi et al, 2022). This scenario is less pronounced for high-tech industry firms since they need to rely less on tangible assets than their counterparts.…”

“…First, we choose two critical events related to climate change issues and awareness to observe (namely, the release of the Stern Review report in 2006 and the signing of the Paris Accord in 2016) that should foster corporate climate risk mitigation awareness and effective strategic policies. The Stern Review (a 700page report) released to the UK Government in 2006 is considered one of the first and foremost detailed and comprehensive discussions about the impact of CCR on economics and business that has helped increase policy-oriented awareness regarding the issue (Javadi et al, 2022;Painter, 2020;Stern, 2008). Similarly, the signing of the Paris Accord in 2016 by a supermajority of countries is a milestone event.…”