Economic Consequences of Environmentally Sustainable Improvements for Corporate Liquidity in Emerging Markets

Abstract

This study examines the association between environmentally sustainable improvements and corporate liquidity in BRICS economies. Using a panel of non-financial firms from 2010 to 2022, the study considers both the pre-COVID-19 period and the post-COVID-19 period. Environmental improvement is measured through three related but distinct indicators: environmental product innovation (EPI), sustainable environmental progress (SEP), and environmental improvement patent filings (EPR). Corporate liquidity is measured by the financial liquidity ratio. The empirical analysis applies a two-step system GMM estimator to reduce dynamic panel bias and endogeneity concerns, while fixed-effects estimates and sub-period tests are used as complementary checks. The results show a statistically significant negative association between environmental improvement and financial liquidity. This suggests that firms engaged in sustainability activities tend to hold lower cash reserves, either because they use internal funds for green investments or because improved operating efficiency reduces the precautionary need for cash. The findings remain broadly consistent across the main model and the pre- and post-pandemic sub-samples, although the strength of the relationship varies across sustainability indicators. The study contributes to the literature by clarifying how environmental commitments may reshape cash-holding policies in major emerging economies. The conclusions should be interpreted cautiously because institutional quality, reporting practices, and access to external finance differ across BRICS countries.