Investigating the Impact of ESG Disclosure Quality on Liquidity Risk and Financial Flexibility: The Moderating Role of Cash Holdings

Abstract

This study aimed to examine the effect of ESG disclosure quality on liquidity risk and financial flexibility, with emphasis on the moderating role of cash holdings among companies listed on the Tehran Stock Exchange. This applied study employed a descriptive-correlational research design based on panel data analysis. Based on theoretical foundations in sustainability reporting and financial structure literature, multiple regression models were developed. Data extracted from companies’ financial statements and management discussion reports were analyzed using the Generalized Least Squares (GLS) method. The findings indicated that improving the quality of sustainability and ESG disclosures contributes significantly to reducing liquidity risk and enhancing corporate financial stability by decreasing information asymmetry and improving stakeholder relationships. Furthermore, ESG-related risks, such as reputational risks, increase the likelihood of stakeholder sanctions and make external financing more costly. In this regard, cash holdings played a significant moderating role. Companies exposed to ESG-related risks increased their cash holdings based on a precautionary motive to cope with adverse financial shocks and maintain operational continuity. This cash buffer mitigated the effects of financial constraints and contributed to preserving financial flexibility. ESG disclosure quality is not merely a tool for increasing transparency; rather, it serves as a strategic mechanism for managing liquidity risk and enhancing financial flexibility. By adopting optimal cash holding policies, managers can mitigate the negative consequences of reputational risks and cash flow fluctuations and ensure corporate continuity and financial stability under conditions of economic uncertainty.