Is the relationship between climate policy uncertainty and cash holding nonlinear?

This Version: August 18, 2025

Augustinos Dimitras

Corresponding author. School of Social Sciences, Hellenic Open University, Patras, Greece.

dimitras@eap.gr

Efstathios Magerakis

School of Social Sciences, Hellenic Open University, Patras, Greece.

efstathios.magerakis@ac.eap.gr

George Peppas

School of Social Sciences, Hellenic Open University, Patras, Greece.

gpeppas@eap.gr

Abstract

This paper examines the nonlinear relationship between climate policy uncertainty and corporate cash holdings among nonfinancial, non-utility firms. Using a United States comprehensive panel data set and employing both quadratic and cubic polynomial specifications, we document robust evidence of a regime-dependent and non-monotonic association. The results reveal that cash holdings initially decline with increases in climate policy uncertainty; however, as uncertainty intensifies beyond a threshold, firms increase their cash balances, consistent with precautionary motives. To address identification concerns and ensure the robustness of these findings, we employ several strategies, including instrumental variables estimation using environmental policy stringency as an instrument, placebo tests with randomly generated cubic terms, and a variety of alternative modeling approaches, such as Poisson regression, changes regression, and entropy balancing. Subsample analyses reveal that the nonlinear effect is most pronounced the nonlinear effect is strongerρ for firms with low financial distress, limited sensitivity to climate policy risk, and non–carbon-intensive classifications. Our findings offer new insights into how firms strategically adjust their liquidity policies in response to evolving climate policy risks, highlighting the importance of nonlinear modeling in understanding corporate financial behavior under uncertainty.

Funding

This research has been financed by the Hellenic Open University through Research Program 80690.