How does corporate climate risk exposure affect cash holdings?

Abstract

How companies respond to climate change is an important issue. Using data on China’s A-share listed companies and employing a text analysis method to generate a measure of firm-level climate risk exposure, this study investigates how corporate climate risk exposure(CCRE) affects cash holdings in an extended framework of the precautionary motive of corporate cash holdings. The results show that CCRE is negatively associated with cash holdings because the perceived investment opportunities of companies with greater climate risk exposure shrink; moreover, they use much more trade credit. Furthermore, the results show that CCRE’s negative effect on cash holdings is more pronounced for small companies and those with higher financial constraints, in highly competitive industries, and in weaker local speculative environments. The findings provide insights into how companies adapt to climate change when managing their liquidity; these insights are useful for governments in supporting companies’ sustainability.

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