Corporate cash holdings in response to climate risk and policies

Abstract

This study examines the effect of state energy policies on corporate cash holdings, focusing on renewable portfolio standards (RPS) as a primary motivating factor driving local companies to hold more cash. Our findings indicate that firms incorporated in states that did not implement RPS tend to hold more cash as they are expected to face increased future climate regulatory risk, in particular around the Paris Agreement. Additional results show that cash demand is higher when firms are incorporated in states dominated by legislatures that do not favor eco-friendly policies.