Climate risk and corporate cash holdings: an international study

Consistent with the precautionary motive of holding cash, we find a strong positive relationship between climate risk and corporate cash holdings of non-financial firms across 41 countries from 2004 to 2019. Our results remain consistent across alternative proxies of cash holdings and climate risk, different regression methods, alternative sample compositions, after considering other sources of uncertainty, and survive after addressing endogeneity issues. We find that climate risk increases cash holdings via the financial constraints channel. Additional analysis provides evidence that the rise in cash reserves is higher among firms in emerging economies, operating within climate-sensitive industries, and after the implementation of the Paris Agreement. Subsequent analysis shows that firms in countries with high uncertainty avoidance, low individualism, and a high long-term orientation culture increase their cash level as a precautionary motive when climate risk increases. We further find that the positive link between climate risk and corporate cash holdings is more pronounced among firms facing more financial constraints and operating in highly competitive industries. Overall, our research highlights that climate risk is a key macro-level determinant affecting corporate cash holdings.