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Does air pollution affect a firm's cash holdings?

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  • Tan, Jianhua
  • Tan, Zhidong
  • Chan, Kam C.

Abstract

We study the effect of air pollution on a firm's cash holdings. Our findings suggest that when pollution is higher, firms hold more cash. The findings are robust to alternative metrics of air pollution and cash holdings and are consistent with the logic that air pollution drives pessimistic mood and/or weakened cognitive ability of management leading to poor operation and a firm's precautionary needs more cash due to pollution abatement or less bank loans. Additional analysis suggests that increase management expense and worsened managerial ability due to air pollution are the transmission channels. Furthermore, we document the increase in cash holdings lowers firm value. Overall, the impact of air pollution has a material impact on a firm's corporate policy in terms of cash holdings.

Suggested Citation

  • Tan, Jianhua & Tan, Zhidong & Chan, Kam C., 2021. "Does air pollution affect a firm's cash holdings?," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    • Handle: RePEc:eee:pacfin:v:67:y:2021:i:c:s0927538x21000561
    DOI: 10.1016/j.pacfin.2021.101549
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    Cited by:

    1. Liu, Xingyu & Kok Loang, Ooi, 2023. "Analysts’ forecast optimism and cash holding: Evidence from China," Finance Research Letters, Elsevier, vol. 57(C).
    2. Yang, Yefei & Wang, Ziwei & Dong, Ciwei & Cheng, T.C.E., 2024. "How does heavy haze weather impact operational efficiency? An empirical study of Chinese manufacturing firms," International Journal of Production Economics, Elsevier, vol. 273(C).
    3. Hu, Zhenyu & Chang, Jui-Chin, 2022. "Does air pollution affect dividend policy," Finance Research Letters, Elsevier, vol. 49(C).
    4. Lai, Xiaobing & Zhang, Fan, 2022. "Can ESG certification help company get out of over-indebtedness? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).
    5. Baohua Liu & Junfeng Wu & Kam C. Chan, 2021. "Does air pollution change a firm's business strategy for employing capital and labor?," Business Strategy and the Environment, Wiley Blackwell, vol. 30(8), pages 3671-3685, December.
    6. Tan, Zhidong & Yan, Lina, 2021. "Does air pollution impede corporate innovation?," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 937-951.
    7. Jianhua Tan & Kam C. Chan & Yining Chen, 2022. "The impact of air pollution on the cost of debt financing: Evidence from the bond market," Business Strategy and the Environment, Wiley Blackwell, vol. 31(1), pages 464-482, January.

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