How Does Mandated Non-Financial Disclosure Affect Corporate Cash Holdings? Evidence from the CSR Disclosure Mandate in China

We examine whether and how mandatory non-financial disclosure affects corporate cash holdings. Using a panel data set of Chinese A-share listed firms from 2005 to 2012 and exploiting the introduction of mandatory corporate social responsibility (CSR) disclosure for a subset of firms as a quasi-natural experiment, we find that firms subject to the mandate significantly reduce their cash holdings relative to unaffected firms. We show that reductions in firm-specific (idiosyncratic) risk constitute the primary channel through which CSR disclosure affects cash policy, relative to alternative explanations related to systematic risk and corporate governance. Consistent with the precautionary motive of cash holdings, the effect is more pronounced among financially constrained firms. In addition, mandated firms exhibit improved access to external financing and a lower marginal value of cash. Overall, our findings suggest that mandatory CSR disclosure weakens the precautionary demand for cash by enhancing the firm's information environment, highlighting the important role of non-financial information transparency in shaping corporate financial policies.