Abstract
Investors increasingly use ESG information for their investment decisions. The purpose of this study is to investigate whether investors practise disciplinary trading using the ESG scores provided by rating agencies to influence firms’ cash holdings. Employing a larger sample of US listed firms, we find that stock liquidity acts as a channel between ESG scores and cash holdings. ESG scores carry vital information on the effectiveness of firms’ governance and agency problems. Hence, investors respond to ESG information through stock trading that send signals to management, resulting in changes in firms’ cash holdings. Consequently, investors use stock trading as a mechanism to create the necessary push for insiders to resolve agency problems.
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