ESG scores and cash holdings: The role of disciplinary trading

Benjamin Liu, Shireenjit Johl and Ruwan Lasantha

Finance Research Letters, 2023, vol. 55, issue PA

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.

Keywords: Agency theory; Cash holdings; Corporate governance; Disciplinary trading; ESG; Stock liquidity (search for similar items in EconPapers)
JEL-codes: G11 G12 G30 G34 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:55:y:2023:i:pa:s154461232300226x

DOI: 10.1016/j.frl.2023.103854

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