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Environmental rule enforcement and cash holdings: Evidence from a natural experiment

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  • Tan, Jianhua
  • Chen, Tao
  • Zhang, Peng
  • Chan, Kam C.

Abstract

The recently invoked Environmental Inspection Program (EIP) in China, which aims to guarantee compliance with environmental rules in the industrial sector, is the basis for our investigation comparing the cash holdings for manufacturing firms in EIP cities and non-EIP cities. While previous studies examine the determinants of a firm's cash holdings, how environmental rule enforcement contributes to such decisions is unclear. Using a difference-in-differences approach, we compare the cash holdings before and after the EIP (2014–2018) for manufacturing firms headquartered in EIP cities and non-EIP cities. We find that firms in EIP cities hoard less cash than non-EIP cities, suggesting that EIP enhances cash management efficiency. The findings also indicate that the negative relation between the EIP and cash holdings is driven by poor governance and pollution severity.

Suggested Citation

  • Tan, Jianhua & Chen, Tao & Zhang, Peng & Chan, Kam C., 2021. "Environmental rule enforcement and cash holdings: Evidence from a natural experiment," Economic Modelling, Elsevier, vol. 103(C).
    • Handle: RePEc:eee:ecmode:v:103:y:2021:i:c:s0264999321002078
    DOI: 10.1016/j.econmod.2021.105618
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    More about this item

    Keywords

    Environmental rule enforcement; Cash holdings; Agency motives; Precautionary motives;
    All these keywords.

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • M00 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - General - - - General

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