Climate Change Exposure and Cash Holdings

We study the effects of climate change exposure on firms' cash holdings using a recently developed measure which decomposes the overall exposure into opportunities and uncertainties. We find that firms with a greater overall exposure to climate change hold more cash, and this effect is mainly driven by climate change-related opportunities. This is consistent with the hypothesis that firms hoard cash to prepare for future opportunities. Methodologically, we use the contemporaneous weather conditions as well as those from the recent past as instrumental variables. These results provide new evidence on the relationship between climate change and cash holding.