Green credit policy and corporate cash holdings: Evidence from China

Weiping Li, Xiaoqi Chen and Tao Yuan

Accounting and Finance, 2023, vol. 63, issue S2, 2875-2903

Abstract: In 2012, China implemented a green credit policy (GCP) that restricts bank credits to heavily polluting firms. Using a difference‐in‐differences research design, we find that polluting firms increased their cash reserves by 9.5% after the GCP's issuance relative to non‐polluting firms. We also document that the GCP significantly reduces firms' access to bank finance but increases the value of cash. Cross‐sectional analysis shows that the increase in cash holdings is more significant for firms with greater financial constraints, firms with more investment opportunities, and high‐tech companies. Overall, our findings are consistent with a constraint explanation: when external financing is restricted, firms retain more cash to meet future investment needs.

Date: 2023
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