ESG scores and corporate cash holdings: evidence from European listed companies

Abstract

This thesis examines how ESG performance influences the amount of cash held by listed companies in Europe. ESG, which refers to environmental, social, and governance pracIces, is increasingly seen as an important factor in corporate strategy and investor decisions. However, its impact on financial policies such as liquidity management is sIll not well understood, especially in the European context. The main quesIon is whether companies that perform beUer on ESG hold less cash. The idea is that ESG engagement builds trust with stakeholders, reduces perceived risk, and improves access to external financing. As a result, these firms may not need to keep as much cash for precauIonary reasons. The analysis uses panel data from 2015 to 2024 and applies fixed effects models to control for differences between firms and over Ime. The results show a clear and negaIve link between ESG scores and cash holdings. Companies with higher ESG performance tend to hold less cash. This effect is mainly contemporary. However, when ESG scores are lagged by one year, the relaIonship remains negaIve and significant, although weaker. This suggests that ESG also has a delayed influence on financial behavior, but that the strongest impact is observed in the same year. The effect is not the same across all contexts. It is driven by the social component of ESG and is only observed among firmslocated outside Western Europe. The study also showsthat firms with more physical or intangible assets tend to hold less cash, as these assets can be used as collateral when raising funds. Overall, the findings confirm that ESG performance influences how firms manage their liquidity, both immediately and over Ime. ESG is not only symbolic. It also shapes financial policy.