Year: 2026
Type: article
Abstract: As climate-related risks intensify and environmental policy becomes increasingly uncertain, understanding how firms adjust their financial policies to climate policy uncertainty has become increasingly important. This paper examines whether corporate cash holdings respond nonlinearly to climate policy uncertainty (CPU). Using a panel of U.S. nonfinancial, non-utility firms over 1987-2023 and a news-based CPU index, we estimate polynomial specifications, complemented by a stacked event analysis around five major climate policy events, to capture heterogeneity across levels of uncertainty and firm exposure. The results reveal a fitted U-shaped pattern within the observed range of CPU: cash holdings decline by about 1.5 percentage points of assets across the central range of the CPU distribution and rise only at high CPU levels. Interpreted through real-options and precautionary-liquidity mechanisms, the pattern differs with firms’ investment opportunities, and firms with greater predetermined carbon exposure hold more cash after major climate policy events, suggesting that the liquidity response to CPU varies with the level of uncertainty and with firm characteristics. The findings contribute to the literature on policy uncertainty and corporate liquidity management and offer implications for the design of predictable climate regulation and for assessing firms’ capacity to adjust to transition risk.
Institution: Hellenic Open University
Language: English
Subfield: Finance
Domain: Social Sciences
SDG: Climate action
Open Access status: hybrid
Estimated APC paid: $3,050
OpenAlex ID: W7220904640