Cash Holding Behavior of the GHG Emitting Firms

Abstract

Recent global initiatives to reduce carbon emissions have increasingly exposed the carbon-emitting firms to regulatory and technological shocks. Given these shocks, we examine whether carbon emissions affect corporate cash holdings and find that carbon-emitting firms, on average, carry less cash. This finding is robust to alternate measures of our main variables, different model specifications, and various methods to address endogeneity, including a difference-in-differences approach. In the cross-section, we find that the documented negative relationship between carbon emissions and cash holdings magnifies with weaker internal governance, CEO overconfidence, and higher internal social capital. Further analyses reveal that carbon-emitting firms prefer spending more on capital investment but less on dividends and R&D activities. Finally, we document that carbon-emitting firms with excess cash holding have a lower firm valuation and a higher cost of capital, indicating that the capital market rewards them for holding less cash. Overall, consistent with agency theory, our results indicate that managerial preference for suboptimal investment or avoidance of external disciplining might attribute lower cash holding for carbon-emitting firms.