ESG reputation risks, cash holdings, and payout policies

Abstract

This paper examines the financial implications of environmental, social, and governance (ESG) reputational risks and evaluates if excessive cash holdings and corporate payout policies can play influential roles in firm valuation by investors. We find empirical evidence suggesting that when ESG reputational risks intensify, investors particularly penalize the stock price of firms with excessive or high cash levels. This effect is particularly pronounced when managers do not employ any form of corporate payout policies. Further analysis reveals that cash distributions in the form of dividend payments or share repurchases may help mitigate shareholders’ antipathy to excessive and high cash holdings.