Climate change poses a significant threat to economic development and human health. International agreements like the United Nations Framework Convention on Climate Change, the Kyoto Protocol, and the Paris Agreement aim to address this challenge. China, a major emitter, has implemented various policies and regulations to achieve its carbon emission peak and carbon neutrality goals, including a comprehensive "1+N" policy system. All enterprises contribute to carbon emissions through their operations, making it crucial to improve regional carbon efficiency – the GDP generated per unit of carbon emissions. Higher regional carbon efficiency indicates a better balance between economic growth and emissions reduction. Simultaneously, high corporate cash holdings have become a global phenomenon, often leading to diseconomies of scale. This study aims to explore the relationship between regional carbon efficiency and corporate cash holdings in China, hypothesizing that higher regional carbon efficiency will reduce corporate cash holdings due to decreased carbon risk, improved debt financing capabilities, and increased long-term investments.

The literature on corporate cash holdings identifies various factors influencing this decision, including precautionary, transaction, and investment motives (Keynes, 1936). Recent research emphasizes the precautionary motive, highlighting the role of uncertainty, credit lines, innovation, market competition, corruption, and green credit policies. Another stream of literature focuses on the economic impacts of climate change and regional carbon efficiency, with studies examining macroeconomic and microeconomic consequences. While research has explored the effects of carbon risks and climate change on various aspects of business, the relationship between regional carbon efficiency and corporate cash holdings remains under-explored.

The study uses data from Chinese A-share listed companies from 2008 to 2019. The dependent variable is corporate cash holdings, measured in two ways: (1) cash and cash equivalents/total assets (Cash1), and (2) (cash + trading financial assets)/(total assets - cash and cash equivalents) (Cash2). The independent variable is regional carbon efficiency, calculated as the regional GDP divided by carbon emissions. Control variables include Tobin's Q, firm size, age, largest shareholder's shareholding ratio, growth rate, profitability, asset turnover rate, operating cash flow, working capital, and dividend and interest payments. The study employs a two-way fixed effects model to control for firm and year effects. To examine the mechanism, a mediating effect test model is used, focusing on debt financing capacity and long-term investment as mediating variables. Instrumental variables (IV) are used to address potential endogeneity issues. Robustness checks include changing the measurement of dependent and independent variables, altering the estimation model, and excluding interpolated data.

The empirical analysis reveals a significant negative relationship between regional carbon efficiency and corporate cash holdings. This finding remains robust after various robustness checks, including using instrumental variables to address potential endogeneity concerns. The mediating effect analysis indicates that regional carbon efficiency reduces cash holdings through two channels: improved debt financing capacity and increased long-term investment. Higher regional carbon efficiency leads to better debt financing access due to reduced carbon risk, while simultaneously encouraging firms to undertake long-term investments, thus reducing their need for precautionary cash reserves. The results consistently demonstrate that improved regional carbon efficiency is associated with lower corporate cash holdings across different model specifications and robustness tests. The Cragg-Donald Wald F-statistics consistently support the validity of instrumental variables used in the endogeneity treatment.

The findings support the hypothesis that improved regional carbon efficiency reduces corporate cash holdings. Lower carbon risk associated with higher carbon efficiency leads to more stable cash flows and reduced need for precautionary cash. The improved debt financing capacity and increased long-term investment further contribute to this effect. These findings offer valuable insights into the interaction between environmental policies, corporate finance, and firm behavior. The results highlight the potential benefits of carbon emission reduction policies beyond environmental improvements. Specifically, the study demonstrates that addressing climate change can positively influence corporate financial decisions and contribute to overall economic efficiency.

This study provides strong evidence that higher regional carbon efficiency leads to lower corporate cash holdings in China. This reduction is driven by both decreased carbon risk and the resulting improved access to debt financing and increased investment in long-term projects. The results suggest that policies aimed at improving regional carbon efficiency can positively impact corporate finance decisions and contribute to a more efficient allocation of capital. Future research could explore the heterogeneous effects of regional carbon efficiency across different industries, firm characteristics, and governance structures, and further investigate the impact of other environmental policies on corporate financial decisions.

The study relies on a specific definition of regional carbon efficiency (GDP per unit of carbon emissions), which may not fully capture the complexity of carbon efficiency. Furthermore, the focus on the precautionary motive for cash holdings might neglect other factors influencing cash management decisions. Future studies should consider a more comprehensive measure of carbon efficiency and incorporate a broader range of potential influences on corporate cash holdings.