Does sovereign ESG shape corporate cash management in emerging markets?

Environmental, social, and governance aspects are becoming increasingly crucial factors for investors decisions. This paper examines the effect of sovereign environmental, social, and governance (SESG) practices on the cash-holding decisions of firms in the Gulf Cooperation Council (GCC) region. Utilizing firm-level data from 2010 to 2022, we find that improved SESG standards lead firms to reduce their cash holdings. The results are robust to sample selection, additional control variables, different estimation methods, and endogeneity concerns. Furthermore, we show a negative relationship between each SESG pillar (environmental, social, and governance) and corporate cash holdings. These findings offer valuable empirical implications for various stakeholders. Regulators can consider the potential impact of SESG standards on corporate financial health, potentially informing future regulations. Shareholders can leverage these findings to assess the potential financial benefits of strong SESG adherence by the companies in which they invest.