ESG Rating Uncertainty and Excess Cash Holdings: Evidence From China

ABSTRACT This study investigates the impact of environmental, social, and governance (ESG) rating uncertainty on excess cash holdings. Using a sample of Chinese A‐share listed companies from 2015 to 2021, we find a positive association between ESG rating uncertainty and excess cash holdings. This finding is robust with alternative empirical design, including instrumental variable (IV) analyses, confounding variable tests and alternative measures of the main variables. Our mechanism analyses indicate that ESG rating uncertainty stimulates excess cash holdings through increased divergence of analyst forecasts and decreased investor sentiment. Further analyses show that this effect is mitigated by lower agency costs, higher diligence of independent directors, greater government subsidies and stronger political connections. Overall, our findings contribute to the existing literature on ESG rating uncertainty and excess cash holdings and provide important and timely implications for policymakers, firm managers and investors.