Carbon emissions and liquidity management

Do higher carbon-emitting firms increase liquidity out of reluctance to invest in an era of rapidly changing climate policy concerns? Are rapidly escalating climate concerns placing higher carbon-emitting firms in a position where they are liquidity stressed? Liquidity management has long informed scholarly research in corporate finance. However, despite nearly universal interest in environmental aspects of finance, the intersection of liquidity and emissions management remains thinly studied. To address this gap, we analyze data of nonfinancial firms' carbon emissions and liquidity management for 2014-2021, using a robust methodological approach involving static and dynamic analysis with robust standard errors, GMM, and 2SLS regressions. For robustness, we incorporate an instrumental variable based on local mortality rates attributable to air pollution. Results show a strong negative relationship between firm-level emissions and firm liquidity, as reflected by net working capital ratios. Results are consistent with emissions-generating firms being either confident to expend liquidity even in an era of changing climate policy risks or, more plausibly, being stressed to preserve liquidity.