Can ESG reconcile the conflicting motives of cash holding? Evidence from China

Companies maintain cash reserves primarily for transactional and preventive needs, yet excessive cash reserves may foster managerial agency problems. Against the backdrop of heightened attention to corporate environmental, social, and governance (ESG) performance, whether ESG can serve as a mechanism to mediate the conflict between motives for holding cash necessitates further exploration. This paper focuses on the relationship between ESG performance and corporate cash reserves, uncovering a negative association between them. This conclusion persists across a series of robustness checks. Other tests indicate that ESG reduces corporate cash holdings by decreasing information asymmetry, default risk, and agency motives, affirming ESG’s positive role in alleviating conflicts in cash holding motives. Our heterogeneity analysis shows that the negative correlation between ESG and corporate cash holdings is more pronounced in private companies, non-highly polluting companies, and companies with lower degrees of capital market liberalization. Furthermore, the economic consequences demonstrate that the cash savings brought about by ESG performance significantly propel corporate growth. Our research offers beneficial insights for companies in emerging nations to alleviate the pressure of cash holdings.