Climate Risk Perception and Corporate Responses Under the Paris Agreement: Evidence From Firms' Cash Holdings

ABSTRACT This paper leverages the Paris Agreement as an exogenous shock and employs a difference‐in‐differences design to causally identify the impact of climate risk perception on the cash holding behaviour of Chinese firms. We find that corporate climate risk perception significantly increased cash reserves following the adoption of the Paris Agreement. Our main findings remain robust after conducting a series of robustness tests. Further analysis reveals that the perception of low‐carbon transition risk has a more significant impact on corporate cash holdings than the perception of climate change risk. We also identify two potential mechanisms through which climate risk perception influences cash holdings: financing constraints and green innovation. In addition, firms' financial resilience moderates the impact of climate risk perception on cash holding decisions. This paper advances existing cash holding theories and climate finance theory and establishes the causal relationship between firms' climate risk perception and their financial decision‐making behaviours.