American cash - ESG and cash holdings in S&P 1500 firms

Abstract

We study the relationship between ESG and cash holdings in US S&P 1500 firms. We find that the marginal market value of cash holdings and the impact of ESG varies based on investors’ expectations and the context in which firms operate. We find that responsible firms with high ESG have excess cash holdings valued positively. Low-ESG firms signals a heightened risk of agency problems and excess cash holdings are valued negatively. We also show that this effect diminishes when shareholder protection is low. After controlling for ESG, excess cash holdings are seen as idle investments or subject to misuse, thus being devalued. Having insufficient cash holdings in combination with high ESG is negatively impacting firm value since ESG investments are viewed as irresponsible when firms are illiquid. We find a generally negative impact from ESG performance on firm value, which turns positive during the Covid-19 pandemic. Financial crises are surrounded by information asymmetry and lower trust. High ESG signals trust in this context, hence ESG is a mitigating factor during the Covid-19 crisis.