Environmental Regulation and Corporate Cash Holdings: Evidence From China’s New Environmental Protection Law

Chao Zhang,Jinkai Cheng

doi:10.3389/fenvs.2022.835301

Abstract

Exploiting the 2014 Environmental Protection Law (EPL) in China as quasi-natural experiments, we adopt a difference-in-differences approach to examine the impact of environmental regulation on corporate cash holdings. We document that heavy-polluting firms increase their cash holdings 15% more than non-heavy-polluting firms due to stringent environmental regulation. Further tests show that the heightened environmental uncertainty, the limited access to bank loans, and the decline in obtaining government subsidies for heavy-polluting firms are three plausible channels that allow environmental regulation to increase corporate cash holdings. The effects of environmental regulation on cash holdings are stronger for firms without political backgrounds and those in regions with less dependent on the secondary sector. Overall, our results offer original evidence showing how environmental regulation in emerging economies affects firms’ liquidity management decisions and support the precautionary effect of cash holdings.

Highlights

Sustainable economic development is of great importance, which has received increasing attention in the literature (Saleem et al, 2020; Anser et al, 2021b; Khan et al, 2021a; Muhammad et al, 2021; Ramzan et al, 2021; Sharma et al, 2021f; Yikun et al, 2021)
We investigate the causal effect on corporate cash holding behaviors of stringent environmental regulation measures using, China’s Environmental Protection Law (EPL) amended and officially passed in April 2014, which delivered an exogenous shock to the level of environmental regulation in the country
We investigate how environmental regulation triggered by the new EPL in China affects public firms’ cash decision-making

Summary

Introduction

Sustainable economic development is of great importance, which has received increasing attention in the literature (Saleem et al, 2020; Anser et al, 2021b; Khan et al, 2021a; Muhammad et al, 2021; Ramzan et al, 2021; Sharma et al, 2021f; Yikun et al, 2021). The adverse impacts of environmental degradation have motivated governments to pursue a collective remedy and issue a series of environmental regulation policies to protect the environment (Adebayo et al, 2021b; Adebayo and Kirikkaleli, 2021; Kirikkaleli and Adebayo, 2021; Mughal et al, 2022). Both the developing and developed countries must balance financial goals with environmental conservation to achieve sustainable development goals (Sharma et al, 2021b; Sharma et al, 2021c; Sharma et al, 2021d; Sharma and Handa, 2021). Our paper is among the first to show how the stringency of environmental regulation could affect corporate cash holdings, especially in a developing country

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