The Role of Environmental, Social, and Corporate Governance Activities in Cash Holding Policies: The Case of the BIST Sustainability IndexYusuf Güneysu
Although firms are important in terms of economic development, they use energy to carry out their production activities and can thus cause environmental pollution. With the increase in environmental pollution, the level of societal awareness regarding the protection of nature has also increased. This situation imposes important responsibilities on firms in terms of ensuring environmental sustainability. Likewise, investors can consider non-financial information alongside financial information when making investment decisions. For this reason, environmental, social, and corporate governance (ESG) components are used for non-financial information disclosures. This study aims to analyze the effect the ESG performance of firms whose stocks are traded on the Borsa Istanbul (BIST) Sustainability Index has on cash holdings. In line with this, the study uses panel data analysis to estimate data for the period of 2015-2021. As a result, the study has determined both the overall ESG score as well as the scores of the individual ESG components to positively affect cash holdings. Moreover, financial leverage, market-to-book value ratio, and net working capital have been determined to positively impact and retained earnings to negatively impact cash holdings.
Çevresel, Sosyal ve Kurumsal Yönetim Faaliyetlerinin Nakit Bulundurma Politikasındaki Rolü: BIST Sürdürülebilirlik Endeksi ÖrneğiYusuf Güneysu
Firmalar, ekonomik gelişme açısından önemli bir rol oynamakla birlikte üretim faaliyetlerini gerçekleştirmek için enerji kullanmakta ve çevre kirliliğine sebebiyet verebilmektedir. Çevre kirliliğinin artmasıyla birlikte toplumların doğanın korunması konusundaki bilinç düzeyi de artmaktadır. Bu durum çevresel sürdürülebilirliğin sağlanması noktasında firmalara önemli sorumluluklar yüklemektedir. Aynı şekilde yatırımcılar, yatırım kararı verirken finansal bilgiler ile birlikte finansal olmayan bilgileri de dikkate alabilmektedir. Bu nedenle finansal olmayan bilgi açıklamaları noktasında Çevresel, Sosyal ve Kurumsal Yönetim (ESG) bileşenleri kullanılmaktadır. Bu çalışma, pay senetleri Borsa İstanbul (BIST) Sürdürülebilirlik Endeksi’nde işlem gören firmaların ESG performansının nakit bulundurma düzeyi üzerindeki etkisini analiz etmeyi amaçlamaktadır. Bu doğrultuda 2015-2021 dönemine ait veriler panel veri analizi kullanılarak tahmin edilmiştir. Çalışmanın sonucunda hem toplam ESG skorunun hem de ESG bileşenlerine ait skorların nakit bulundurma düzeyini pozitif yönde etkilediği saptanmıştır. Ayrıca nakit bulundurma düzeyi üzerinde finansal kaldıraç, piyasa değeri defter değeri oranı ve net çalışma sermayesinin pozitif, dağıtılmayan kârların ise negatif bir etkisinin olduğu belirlenmiştir.
Firms have an important place in countries’ economies and create added value for society. However, they can also cause environmental pollution as a result of their production activities. On the other hand, societal awareness regarding such issues as carbon emissions, climate change, and consumption of natural resources has increased. Thus, stakeholders expect firms to fulfill their environmental, social, and corporate governance responsibilities (Liao et al., 2023). The performances of firms regarding these issues can be described through the components of environmental, social, and corporate governance (ESG).
ESG can be explained as a non-financial evaluation system that considers how firms address the environment, society, and corporate governance for supporting their sustainable development and encourages firms to focus on the interests of stakeholders (Chen et al., 2023). ESG activities are important for investors as they represent the risks and opportunities
firms face. In addition to financial information, investors can also use non-financial information such as ESG factors when making investment decisions (Limkriangkrai et al., 2017). In this context, firms’ ESG performances also affect the level of their cash holdings (Atif et al., 2022).
Cash holding decisions are important for the continuance of a firm’s activities and its ability to overcome extraordinary situations (Li et al., 2021). Therefore, cash holdings have two main benefits: a transaction motive and a precautionary motive. However, managers and shareholders often evaluate the benefits and costs of cash holdings differently. This situation is explained by agency theory (Opler et al., 1999). An effective monitoring mechanism can help resolve agency problem a firm is experiencing. In this context, ESG disclosures may provide firm-specific information to shareholders with regard to monitoring its use of cash holdings (Atif et al., 2022).
This study aims to investigate the effect ESG scores have on cash holdings by using panel regression models to estimate the data of firms traded on the BIST Sustainability Index between 2015-2021. The literature reveals a limited studies to have examined the effect of ESG performance on the level of cash holdings (e.g., Atif et al., 2022; Alhares et al., 2023; Liu et al., 2023). This is because most studies in the literature have generally focused on firms’ financial performance, market value, and capital costs (e.g., Velte, 2017; Eliwa et al., 2021; Zhou et al., 2022; Chen et al., 2023). In this regard, the current study is expected to contribute to expanding the studies that estimate the relationship between ESG performance and cash holdings. In addition, this study also enables the impact of both ESG performance and ESG dimensions to be evaluated regarding cash holdings in Türkiye as an emerging market.
The study uses cash holdings as the dependent variable and overall ESG score and the individual ESG component scores as the independent variables. The control variables include financial leverage ratio, market-to-book value ratio, net working capital, and retained earnings. As a result, the study has determined the overall ESG score to have a positive and significant effect. In other words, an increase in a firm’s overall ESG performance also increases its cash holdings. At the same time, the individual ESG component scores were also determined to have a positive significant impact on cash holdings. In terms of the control variables, the effect of financial leverage, market-to-book value, and net working capital on the level of cashholdings was found to be positive, while the effect of retained earnings on cash holdings was concluded to be negative. According to the study’s findings, firms can be stated to hold more cash in order to reduce the risk of financial distress, overcome extraordinary situations, and gain a competitive advantage.