Green Credit Policy and Corporate Cash Holdings: Evidence from China

Abstract

In 2012, China implemented a green credit policy (GCP) that restricts bank credits to heavily polluting firms. Using a difference-in-differences research design, we find that polluting firms increase their cash reserves by 9.5% after the GCP’s issuance relative to non-polluting firms. We also document that the GCP significantly reduces firms’ access to bank finance but increases the value of cash. Cross-sectional analysis shows that the increase in cash holdings is more significant for firms with greater financial constraints, firms with more investment opportunities, and high-tech companies. Overall, our findings are consistent with a constraint explanation: When external financing is restricted, firms retain more cash to meet future investment needs.

Keywords: cash holding; China; financial constraint; green credit policy

JEL Classification: G31; G32; G38