Climate Policy and Corporate Cash Holding: Evidence from the Compensation Distribution and Wage Gap in China

42 Pages Posted: 4 Dec 2024

See all articles by jian xu

jian xu

Hubei University of Economics

Dongmin Kong

School of Economics, Huazhong University of Science and Technology

Abstract

This paper examines the casual effects of climate policy on the firm’s cash holdings in China. By introducing the shock of the implementation of the low-carbon city pilot policy, our staggered difference-in-differences estimations demonstrate that the climate policy has a significantly positive effect on firm’s cash holdings. One potential explanation is that the manager holds a negative emotion towards the climate regulation, and the firm located low-carbon city increases cash to hedge the potential climate transition risk. In addition, the manager’s and employee’s salary per capital in regulated firms both have significant decreases by 5% and 10% respectively, which result in the increase of wage gap among the firm’s workforces. The heterogeneity analysis shows that the effects are more pronounced in non-state-owned firms, firms relying on external finance, firms with stronger managerial entrenchment, and firms under industry with high carbon intensity. Our findings support the costly external finance hypothesis, which asserts that firm with greater climate risk-taking has difficulty in raising external capital or faces a higher cost of external funds, and, therefore, require greater liquidity by holding more cash and reducing workers’ wages. It also provides timely policy implications for central regulators to understand the unintended consequences of climate policy in developing country.

Keywords: Climate policy, Cash holding, Wage gap, Transition risk, Natural experiment, China

Suggested Citation

xu, jian and Kong, Dongmin, Climate Policy and Corporate Cash Holding: Evidence from the Compensation Distribution and Wage Gap in China. Available at SSRN: https://ssrn.com/abstract=5043953 or http://dx.doi.org/10.2139/ssrn.5043953

Jian Xu (Contact Author)

Hubei University of Economics ( email )

Jiang-xia
Wuchang
Wuhan, 430205
China

Dongmin Kong

School of Economics, Huazhong University of Science and Technology ( email )

Bldg. of Econ. School, Louyu Rd. 1037#
HUST, Hongshan Dist.
Wuhan, Hubei 430074
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
30
Abstract Views
105
PlumX Metrics