ESG (Environment, Social and Governance) represents a relatively new approach to sustainability, offering potential benefits in enhancing cash management and risk mitigation. Research has shown that during uncertain times, firms increase their cash holdings for precautionary motives. However, high levels of cash may lead to negative consequences for firm performance, such as agency problems. The purpose of this study is to examine whether ESG plays a moderating role in cash holdings during the COVID-19 pandemic. Using U.S. firm-level quarterly data spanning from 2018 to 2021, we find that ESG alleviates the impact of COVID-19 on cash holdings. Furthermore, ESG exerts a greater role in larger firms during uncertain times. Additionally, governance exerted the most significant influence on cash holdings. Moreover, firms with better ESG enhance firm value and lower firm risk. This study has practical implications for investors and executives in understanding the role of ESG during periods of uncertainty.
Yang et al. (Thu,) studied this question.