Temperature Trend and the Value of Cash Holdings
46 Pages Posted: 25 Mar 2021 Last revised: 10 Jan 2022
Date Written: December 20, 2018
We examine the causal effects of temperature change on companies’ cash policies. We find that US firms increase their cash holdings in response to increasing climate risks. The empirical results show that firms with greater mean temperature departure hold more cash. The increase in cash reserves is attributed to growing public awareness of climate-related risks (e.g. global warming). The positive effect of temperature change is more pronounced among financially constrained firms, socially responsible firms, and firms in high-carbon-emission industries. Further, we demonstrate that investors increase their valuation of cash in unconstrained firms and in better monitored firms. Overall, our findings support the precautionary motive for a firm’s cash holdings.
Keywords: Climate (Temperature) Change; Cash Holdings; Global Warming; Policy Uncertainty
JEL Classification: R31; R32
Suggested Citation: Suggested Citation