ESG ratings of major customers and firms' cash holdings: evidence from China

Purpose This study examines whether and how major customers' environmental, social, and governance (ESG) ratings influence supplier firms' cash holdings, which represent key corporate liquidity decisions. Design/methodology/approach Using data from Chinese A-share listed firms from 2009–2021 with identifiable major customer relationships, we construct a customer-supplier matched dataset and estimate ordinary least squares regressions. Findings This paper documents a positive relationship between major customers' ESG ratings and suppliers' cash holdings. These findings support the precautionary motive of cash holdings, particularly the risk effect rather than the trust effect. The results remain robust after multiple robustness checks are conducted and endogeneity concerns are mitigated. The results of cross-sectional analyses indicate that the positive relationship becomes stronger with greater importance of supply chain relationships, greater information asymmetry, lower supplier bargaining power, and stronger supplier risk response capability. These patterns suggest that suppliers accumulate cash reserves to hedge against ESG-related compliance pressures and reputational spillover risks originating from their major customers. Originality/value This study shows that major customers' ESG ratings increase supplier cash holdings through the risk effect rather than the trust effect. It contributes to supply chain spillover research by distinguishing among competing mechanisms within the precautionary motive and extends cash-holding theory to incorporate non-financial customer characteristics. The findings also offer policy implications for emerging markets such as China, where customer-driven ESG pressure directly influences supplier liquidity decisions.