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ESG scores and cash holdings: The role of disciplinary trading

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  • Liu, Benjamin
  • Johl, Shireenjit
  • Lasantha, Ruwan

Abstract

Investors increasingly use ESG information for their investment decisions. The purpose of this study is to investigate whether investors practise disciplinary trading using the ESG scores provided by rating agencies to influence firms’ cash holdings. Employing a larger sample of US listed firms, we find that stock liquidity acts as a channel between ESG scores and cash holdings. ESG scores carry vital information on the effectiveness of firms’ governance and agency problems. Hence, investors respond to ESG information through stock trading that send signals to management, resulting in changes in firms’ cash holdings. Consequently, investors use stock trading as a mechanism to create the necessary push for insiders to resolve agency problems.

Suggested Citation

  • Liu, Benjamin & Johl, Shireenjit & Lasantha, Ruwan, 2023. "ESG scores and cash holdings: The role of disciplinary trading," Finance Research Letters, Elsevier, vol. 55(PA).
    • Handle: RePEc:eee:finlet:v:55:y:2023:i:pa:s154461232300226x
    DOI: 10.1016/j.frl.2023.103854
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    More about this item

    Keywords

    Agency theory; Cash holdings; Corporate governance; Disciplinary trading; ESG; Stock liquidity;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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