How does ESG performance affect corporate cash holdings: Evidence from China

Under the international call for "peak carbon emissions and carbon neutrality", ESG (Environmental, Social, and Governance) has emerged as a critical metric for evaluating corporate sustainability. Cash, being the most liquid asset held by companies and a key element in implementing investment and financing strategies, is crucial. However, excessive cash holdings are considered a sign of inadequate development capabilities and can exacerbate internal agency problems. In the long term, motivations for holding cash are influenced by various factors. So, what is the relationship between ESG and the amount of cash held by companies? Based on data from listed companies on the Shanghai and Shenzhen Stock Exchanges from 2011 to 2021, this article empirically explores the relationship between ESG performance and corporate cash holdings. The research findings indicate: (1) Companies with higher ESG performance tend to have better internal governance and higher efficiency, but they lack good ESG investment opportunities, thus leading to higher cash holdings. A series of endogeneity tests, such as instrumental variable methods, also confirm the accuracy of this conclusion. (2) Further analysis reveals that compared to small-cap companies, large-cap companies have more ESG investment opportunities, resulting in lower cash holdings. (3) Moreover, compared to private enterprises, state-owned enterprises have more ESG investment opportunities, leading to lower cash holdings.