Carbon Emissions, Firm-Level Climate Change Exposure, and Corporate Cash Reserves

Abstract

This study examines the relationships between carbon emissions, firm-level climate change exposure, and corporate cash reserves, with a focus on whether climate exposure mediates the link between carbon emissions and cash holdings. Using a dataset of 15,889 firm-year observations from 2,537 firms across 51 countries during the period 2002 to 2021, the findings reveal a partial mediating effect of climate change exposure on the relationship between carbon emissions and corporate cash reserves. Specifically, firms with higher carbon risks tend to exhibit increased climate exposure, as reflected in earnings conference calls, which subsequently leads to higher cash reserves. This pattern is consistent across both general indicators of climate exposure and firm-specific vulnerabilities to regulatory changes. Furthermore, the results remain robust after addressing endogeneity concerns through difference-in-difference estimations based on the Paris Agreement (COP21) event. These insights deepen our understanding of how high-carbon-emitting firms adjust their cash management strategies in response to market concerns about climate change.