Environmental taxes and corporate cash holdings: Evidence from China

Abstract

As an economic incentive–based environmental regulation tool, environmental taxes can positively affect enterprise R&D innovation. R&D activities require substantial funds, and ensuring the stability of funds has become an important issue for enterprises, potentially affecting their precautionary motive for corporate cash holdings. This paper takes the implementation of China's Environmental Protection Tax Law as a quasi-natural experiment, takes Chinese listed companies from 2015 to 2020 as samples, and uses the difference in difference method to study the relationship between environmental tax and corporate cash holdings. The results show that the change from an environmental protection fee to a tax increased enterprises' capital demands, significantly promoting cash holding of enterprises. Meanwhile, the results of the mechanism test show that R&D investment is an important motivation for enterprises' cash holdings as it partially mediates the relationship between the environmental tax and cash holdings. Finally, we also find that for enterprises with high financing constraints, non-state-owned enterprises, and firms in areas with low marketization, the impact of the environmental protection fee reform on corporate cash holdings is more pronounced.