Preparing for climate volatility: exploring the impact of climate risk on excess cash holdings

We investigate the impact of climate risk on corporate excess cash holdings. We employ a unique climate risk index from 2014 to 2020 in China and find that climate risk is negatively associated with corporate excess cash holdings. We further find that this negative nexus is (a) weakened in state-owned firms, politically connected firms, and firms with high government subsidies and (b) strengthened in more financially constrained firms. Our findings suggest that climate risk aggravates the liquidity risk faced by firms, leading them into financial trouble and further impeding the development of listed firms.