Environmental policy stringency and cash management: International evidence

We investigate how stringency of environmental policies impacts cash management policy across 40 countries. Our results show greater environmental policy stringency is negatively associated with the level of cash holdings. Additionally, the stringency of environmental policies influences the magnitude of deviation from the target level of cash, as well as the speed of adjustment to the target level. However, the effect of market-based environmental policies on various aspects of cash management often differs from the effects of non-market-based policies and policies that provide technological support. We obtain corroborating results using the Paris Agreement as an exogenous shock to study the impact of an exogenous increase in environmental policy strictness on firms' cash management in a quasi-experimental setting.