How Does Climate Policy Uncertainty Impact Corporate Cash Holdings? Evidence from UAE

Abstract

This study explores the impact of climate policy uncertainty (CPU) on corporate cash holdings in the United Arab Emirates (UAE). The UAE Sustainable Finance Working Group has set principles for effectively managing climate-related risks in the UAE market. Using a panel data analysis for a sample of 46 non-financial firms listed on UAE stock markets during the period from 2013Q1 to 2022Q4, we find that CPU reduces corporate cash holdings. This result confirms the prediction of agency theory and the transaction motive theory. Furthermore, we find that the cash held by corporations responds to high CPU events differently from low CPU events, supporting the asymmetric effect phenomenon. We also find that firm size plays a significant role in reducing the link between CPU and cash holdings. Cash held by large firms responds to CPU differently from cash held by small firms. An increase in CPU produces a greater cash crunch for small firms and very low cash saving for large firms, meaning that liquidity in small firms is greatly harmed by CPU compared to that in large firms. This study serves as a guide for policymakers, managers, stakeholders, and climate policy risk regulators. Public authorities should pursue climate policy risk plans to mitigate the negative effect of CPU. Managers should improve corporate governance to mitigate the negative impact of CPU on corporate cash holdings by effectively managing short-term liquidity and disclosing appropriate information to pursue controlling for climate policy risk.