Green and Liquid: How Mandatory ESG Disclosure and Firm Size Shape the ESG –Cash Holdings Nexus

ABSTRACT This study examines the relationship between Environmental, Social, and Governance (ESG) performance and corporate cash holdings, considering the joint influence of regulatory pressure through mandatory ESG disclosure and firms' internal resource capacity, as reflected by firm size. The sample comprises 13,107 firm‐year observations from 1781 non‐financial firms across the Asia‐Pacific, Europe, and Middle East and Africa regions over the 2016–2023 period. The hypotheses are tested using a moderated moderation model estimated with PROCESS Model 3. The results indicate that under a voluntary ESG disclosure regime, ESG performance has a positive and significant effect on corporate cash holdings for both large and small firms. However, under a mandatory ESG disclosure regime, this relationship becomes negative for small firms while remaining positive and significant for large firms. These findings suggest that regulatory pressure fundamentally alters the implications of ESG performance for corporate liquidity. In contrast, firms' internal resource capacity, as proxied by firm size, determines their ability to absorb regulatory compliance costs. Nevertheless, this resource‐capacity advantage becomes less pronounced under a mandatory ESG disclosure regime. The significant three‐way interaction further demonstrates that firm size conditions the moderating effect of mandatory ESG disclosure on the relationship between ESG performance and corporate cash holdings. These findings remain robust across a series of robustness and endogeneity tests, including alternative variable proxies, pooled ordinary least squares (OLS) with firm‐clustered standard errors, lagged independent variables, propensity score matching (PSM), and the generalized method of moments (GMM). Overall, the findings underscore the importance of designing ESG disclosure regulations that are proportionate to firms' resource capacity.