Green Drives Greenbacks: The Impact of Sustainable Innovation on Corporate Cash Holdings in BRICS Nations
This study investigates the impact of sustainable innovation on corporate liquidity, specifically examining its influence on cash holdings among companies listed in BRICS countries. The study then explores the impact of green innovation on cash holdings before and after COVID-spread. The findings show that companies actively engaged in sustainable practices maintain lower levels of cash. This suggests a tangible reduction in the necessity for large cash reserves among businesses prioritizing green innovation.
The need for businesses to adapt a rapidly evolving environmental landscape has given rise to green innovation (Zhang, et al., 2023), a transformative force that seeks to reconcile economic growth with ecological preservation. As corporations cope with the challenges and opportunities presented by this green wave, one pressing inquiry about the reflections of green innovation on corporate cash management decisions. This query is not merely an academic inquiry; it has real-world implications for the financial health and sustainability of firms, especially in the emerging economies collectively known as BRICS (Brazil, Russia, India, China, and South Africa), where the access to cash is more challenging than developed economies and corporations are less likely to invest in green innovation. The central issue is to assess whether firms that engage in green innovation strategies exhibit different patterns of cash holdings compared to their non-green counterparts.
Cash holding as an indicator for green innovation?
The world has witnessed a growing awareness of environmental issues, including climate change, resource depletion, and pollution (Li, et al., 2023). This awareness has led to a paradigm shift in the way businesses approach innovation and sustainability. Green innovation, often referred to as eco-innovation or sustainable innovation, represents a fundamental departure from traditional innovation practices. It encompasses a wide range of activities, including the development of eco-friendly products, the adoption of cleaner production processes, and the incorporation of sustainability considerations into business strategies (Chen, et al., 2023). Similarly, the concept of cash holdings, or the accumulation of liquid assets by corporations, has been a subject of keen interest for both financial scholars and practitioners. Cash holdings serve various purposes, including meeting short-term obligations, funding investment opportunities, and acting as a buffer against financial distress (Chang & Yang, 2022). However, excessive cash holdings can be seen as an inefficient allocation of resources, leading to reduced firm value and profitability (Akhtar, et al., 2023). Therefore, understanding the factors that influence cash holdings and, more importantly, whether green innovation has an impact on this crucial financial metric.
The accumulation of liquid assets by corporations serve various purposes, like meeting short-term obligations, funding investment opportunities, and acting as a buffer against financial distress.
In view of precautionary motive of cash holdings, enterprises that are involved in green innovation activities have low risk exposures (Lin, et al., 2020), and therefore are less likely to hold the cash. Moreover, green innovations often involve optimizing resource use and reducing waste, which can lead to cost savings. By making processes more efficient and environmentally friendly, firms can lower their operating costs (Rooney, 1993; Dong, et al., 2022). This, in turn, reduces the need for large cash reserves to cover day-to-day expenses and short-term obligations, as they become more self-sustaining. This study contributes to global sustainability efforts by showcasing how firms in emerging markets are responding to environmental challenges. The current study extends the literature by exploring the linkages between green innovation and cash holdings specifically in BRICS economies. An exploration of the relationship between green innovation and cash holdings in these economies can inform global strategies for addressing climate change and sustainability.
Methodology
Quantitative research using longitudinal data with a panel structure and Generalized Method of Moments (GMM) regression technique on listed firms on BRICS markets over 12 years.
Applications and beneficiaries
The implications underscore dual benefits of sustainable innovation, contributing not only to environmental sustainability but also enhancing financial efficiency by minimizing excess cash holdings. This study highlights the importance of integrating sustainability considerations into financial decision-making, offering practical insights for firms seeking to align sustainability goals with effective financial management. It also provides valuable insights for policymakers and investors advocating for green initiatives.
Reference to the research
Umar Farooq, Bakr Al-Gamrh, Jiapeng Dai, (2024) Green drives greenbacks: The impact of sustainable innovation on corporate cash holdings in BRICS nations, Journal of Cleaner Production, Volume 436, 140533.
