How does ESG performance affect the value of cash holdings? Evidence from China

Xiaoqing Li, Chengjie Cui, Guishuang Lv and Yawen Hao

Asian Review of Accounting, 2025, vol. 34, issue 5, 1003-1022

Abstract: PurposeThis study examines the impact and mechanisms of environmental, social and governance (ESG) performance on corporate cash holding value.Design/methodology/approachUsing a sample of nonfinancial firms listed on China’s A-share market from 2009 to 2021, we empirically investigate the impact of ESG performance on the value of cash holdings.FindingsStrong ESG performance reduces the value of cash holdings, supporting a precautionary perspective. Furthermore, ESG performance reduces the value of cash holdings by alleviating financing constraints through three channels: increasing debt financing, increasing commercial credit financing and attracting equity financing. Moreover, the environmental and social dimensions have a more substantial impact on corporate cash holdings than the governance dimension. Finally, the effect of ESG performance on cash holding value is more pronounced for non-state-owned firms, growth-stage firms and firms facing high economic policy uncertainty.Practical implicationsThis study provides important insights for transforming ESG principles from external compliance into core strategic drivers. It can help corporate managers integrate ESG goals into strategic planning and capital allocation to reduce capital costs and enhance value creation.Originality/valueUnlike prior studies that mainly address the relationship between ESG performance and the level of cash holdings, this study uniquely extends the analysis to the value of cash holdings. In addition, it unpacks the mechanisms through which ESG alleviates financing constraints by delineating three specific transmission channels: strengthening debt financing, facilitating trade credit financing and improving equity financing.

Keywords: ESG performance; Value of cash holdings; Agency motive; Precautionary motive (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:arapps:ara-04-2025-0134

DOI: 10.1108/ARA-04-2025-0134

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