Are corporate cash holdings sensitive to neighborhood carbon emissions?

Abstract

Abstract As carbon transition and regulatory risks escalate, understanding the impact of local carbon emissions on corporate financial strategies is essential, particularly in shaping cash holding policies to manage environmental liabilities. This study investigates the impact of neighborhood carbon emissions on corporate cash holdings, introducing a novel exogenous metric that quantifies carbon emission levels within a specific radius around each firm. Our baseline regression results indicate a positive correlation between higher neighborhood carbon emissions and increased corporate cash holdings, and a series of robustness checks confirm the stability of these results across different model specifications. The mechanism analysis suggests that higher neighborhood carbon emissions lead to an increase in cash holdings by reducing corporate ESG performance, increasing financing constraints, and strengthening precautionary expenditures. Moreover, heterogeneity tests reveal that the impact of neighborhood carbon emissions on cash holdings is significant in nonstate-owned enterprises and nonenergy industries, particularly in regions characterized by stringent environmental regulations, higher climate policy uncertainty, and located in the eastern provinces of China. These results underscore the importance of understanding localized environmental risks and their implications for corporate financial strategies.