Biodiversity Risk and Working Capital Management

Using a large sample of US‐listed firms, this study explores the relationship between biodiversity risk and working capital management. Biodiversity risk, an emerging external factor, pressures firms to optimize resource allocation due to increasing regulatory scrutiny and stakeholder awareness. Using a novel firm‐level proxy derived from 10‐K filings, we find that biodiversity‐related risk is negatively associated with a firm's working capital. These findings align with both the precautionary motive theory and the disciplinary channel framework, suggesting that biodiversity risk incentivizes firms to divert resources from working capital management. Cross‐sectional analyses show that this effect is particularly pronounced in financially constrained, distressed, and non–high‐tech firms. Our results are robust to several identification and sensitivity tests, including two‐step GMM estimation, propensity score matching, entropy balancing test, and placebo test, among other approaches. This study highlights the critical role of biodiversity risk as a driver of corporate financial behavior.