Temperature Trend and Corporate Cash Holdings

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Abstract

We examine the causal impact of climate uncertainty on companies’ cash holdings using local temperature trends. We find a notable increase in cash reserves among companies in response to rising climate-related risks. We also identify two significant channels through which climate uncertainty influences firms’ cash management: heightened environmental enforcement risk and increased physical risk. Furthermore, we observe that the positive effect of temperature trends on cash holdings is more pronounced for financially constrained firms and those with a lower level of environmental protection awareness. External financing through equity and debt issuance, as well as cost reduction strategies involving research and development and selling, general, and administrative activities, represent viable avenues for firms to bolster their cash reserves. However, financially constrained firms are less inclined to build up cash reserves through debt financing. Our findings underscore the precautionary nature of corporate cash policies and shed light on how temperature fluctuations can significantly shape corporate behavior.

Original languageEnglish
Pages (from-to)471-499
Number of pages29
JournalFinancial Management
Volume15
Issue number3
Early online date24 Mar 2024
DOIs
Publication statusE-pub ahead of print - 24 Mar 2024

Keywords

  • cash holdings
  • climate (temperature) change
  • corporate governance
  • financial constraints

ASJC Scopus subject areas

  • Economics and Econometrics
  • Accounting
  • Finance

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