Operational cash liquidity as a carbon risk buffer

This study examines the relationship between carbon risk and firm financial performance, focusing on the moderating role of operating liquidity. Using an international panel of 741 firms across 33 countries and five industries, the findings show no significant unconditional relationship between carbon risk and market-based performance. However, operating liquidity positively moderates the relationship between carbon risk and Tobin's Q. Moderation effect remains significant after excluding U.S. firms and the COVID-19 period, introducing temporal specifications, and applying entropy balancing, but is not confirmed for ROA and ROE or under 2SLS and System-GMM estimations. Industry-wise analysis reveals substantial heterogeneity in the direction of the moderating relationship, while regulatory-regime analysis shows contrasting patterns across strong and weak regulatory environments. The findings establish operating liquidity as a context-dependent financial condition and provide implications for managers, investors, and policymakers assessing carbon exposure, financial capacity, and firms' responses to carbon-related pressures across different industrial and regulatory settings.