Environmental rule enforcement and cash holdings: Evidence from a natural experiment

• DOI: 10.1016/j.econmod.2021.105618
• Publication Date: 2021-08-12T06:26:35Z
• Authors: Jianhua Tan; Tao Chen; Peng Zhang; Kam C. Chan
• Keywords: 13. Climate action; 9. Industry and infrastructure; 0502 economics and business; 05 social sciences; 11. Sustainability

Abstract The recently invoked Environmental Inspection Program (EIP) in China, which aims to guarantee compliance with environmental rules in the industrial sector, is the basis for our investigation comparing the cash holdings for manufacturing firms in EIP cities and non-EIP cities. While previous studies examine the determinants of a firm's cash holdings, how environmental rule enforcement contributes to such decisions is unclear. Using a difference-in-differences approach, we compare the cash holdings before and after the EIP (2014–2018) for manufacturing firms headquartered in EIP cities and non-EIP cities. We find that firms in EIP cities hoard less cash than non-EIP cities, suggesting that EIP enhances cash management efficiency. The findings also indicate that the negative relation between the EIP and cash holdings is driven by poor governance and pollution severity.