Do environmental regulations affect firm's cash holdings? Evidence from a quasi-natural experiment

Stricker environmental regulation enable firms to reduce their pollution and alter their investment decision, which may reshape their cash holding decisions. To investigate the relationship between environmental regu-lation, this study carries out the quasi-natural experiment based on the implementation of carbon dioxide emission trading system (CO2 ETS). Based on the Chinese listed firms from 2007 to 2020, we demonstrate that the CO2 ETS enable firms to hold more cash and the positive impact of CO2 ETS on cash holding is more pro-nounced for firms with stronger external monitoring and fewer investment opportunities, non-state-owned en-terprises (non-SOEs), and firms located in less-marketization places. Our study enriches the economic consequence of environmental regulation and undercovers a new determinator for firm's cash holdings.

Automated summary

This study finds that the implementation of CO2 emission trading system enables firms to hold more cash, especially for those with stronger external monitoring, fewer investment opportunities, non-state-owned enterprises, and firms located in less-marketization places. It enriches the understanding of the economic consequences of environmental regulation and uncovers a new determinant for firm's cash holdings.