The effect of corporate environmental responsibility and religiosity on corporate cash holding decisions and profitability: Evidence from the United States' policies for sustainable development

Abstract

AbstractWe use religious background as a proxy for local risk‐taking attitudes and investigate whether geographical variation in religion affects corporate environmental responsibility (CER) with regards to corporate cash policies and profitability. We conjecture that the presence of environmentally conscious firms would be higher in areas with more Catholics relative to Protestants. Study data comprises of the largest publicly traded U.S.‐listed firms of Newsweek's green rankings of 2015–2016. We use green scores and the concentration of Catholic to Protestant population ratio as proxies for CER and religiosity, respectively. We provide robust evidence that corporate environmental practices attenuate the demand for precautionary cash reserves to protect firms from unforeseeable risks. Furthermore, environmentally conscious firms located in high risk‐taking areas gain financial stability and improve profitability, strengthening their CER. The findings provide contributions to risk management literature and document the importance of firms' efforts to harmonize social behavior for sustainable financial policies.