Temperature Change and Companies Cash Policy

Abstract

We examine the causal effects of temperature change on companies’ cash policy. We find that U.S. firms increase their cash holdings in response to increasing climate risks. The empirical results show that firms with greater mean temperature departure hold more cash. The increase in cash reserves is attributed to growing public awareness on climate-related risks (e.g. global warming). The positive effect of temperature change is more pronounced among financially constrained firms, socially responsible firms and for those in high-carbon-emission industries. Further, we demonstrate that investors increase their valuation of cash in unconstrained firms and in better monitored firms. Overall, our findings support the precautionary motive for a firm’s cash holdings.