BI Institute Publication
Central Bank Policy Mix
By Danny Hermawan
This journal explores corporate sustainability in the environmental, social and government sector, particularly in terms of influencing the cash holdings of non-financial companies in Muslim countries from 2003 to 2021. Through panel models, the research found that companies with low ESG (environmental, social and governance) scores actually held more cash. The research further revealed a negative correlation between ESG and cash holdings that was unaffected by the pandemic, especially in Muslim countries, such as Malaysia and Turkey.
In reality, most companies tend to ignore Corporate Social Responsibility (CSR) and ESG principles because they are viewed as a burden. After the 17 SDG's were ratified, however, companies began competing to develop ESG and increase awareness about ESG. Muslim countries have begun establishing a correlation between ESG and cash holdings. Despite country differences due to various cultural influences, based on a research sample of 1,600 companies from 11 Muslim countries in the period from 2003 to 2021, companies with lower ESG were found to hold more cash.
It is important to note that ESG factors, including the environment and water use, carbon emissions, and recycling, to social factors, such as the company's relationship with the community, and security factors for the employees are a form of corporate contribution to management governance. These ESG factors must be enforced because they affect investors, shareholders and stakeholders. This research uses the variable 'cash holdings', as a corporate asset, to review the correlation with ESG. Issues arose, however, relating to cash holdings, namely that managers often used cash holdings for personal gain. This is usually done by a manager in the absence of control mechanisms, leading to the misuse of business resources. Good governance is required in terms of cash holdings, therefore, to ensure that such assets are leveraged to increase corporate value.
A company that actively invests in ESG activities will typically keep abreast of environmental change. The majority of companies, however, were found to have a negative correlation with ESG due to cash misuse issues. In Muslim countries, differences emerge through the influence of religion, politics, social aspects and business. This is because Muslim countries exhibit a low level of individuality. Furthermore, Muslim countries constantly try to prevent and minimise uncertainty in the rules, laws and policies because the business culture in Muslim countries is influenced by Islamic values. Consequently, ESG scores in Muslim countries will adjust to the various cultural differences.
The level of cash to ESG is usually influenced by cultural factors, such as individuality, anticipation of uncertainty, long-term orientation and masculinity. Such cultural influences subsequently impact cash holdings. This study, therefore, seeks to further examine the effect of ESG sustainability in Muslim countries on cash holdings during the Covid-19 pandemic.
To confirm the empirical data, this research applies a study model to explore the sustainability of Muslim companies against environmental, social, government and ESG scores to corporate cash holdings. The research variables were taken from companies based on the Thomson Reuters Datastream from 2003 to 2021 in 11 countries, namely Bahrain, Egypt, Indonesia, Kuwait, Malaysia, Morocco, Oman, Qatar, Saudi Arabia, Turkey and Arab countries. The variables were chosen using a comparative study to find which models were the most applicable for analysis.
Concerning the relationship between corporate sustainability and cash holdings, the research found that the ESG variable had a negative correlation with cash holdings, namely that companies with a low ESG value held more cash. This is consistent with the argument that smaller companies which do not implement ESG practices tend to hold more cash. During the Covid-19 pandemic, the negative correlation was shown to increase due to the diverse emerging motives for corporate cash transactions. Research and development (R&D) spending on ESG had a significant impact on cash expenditures during the pandemic. This research indicated that companies with a high R&D budget actually held more cash during the pandemic.
How was corporate sustainability affected during the pandemic in terms of cash holdings? The research found that Muslim companies in Morocco recorded the highest ESG scores and Muslim companies in Bahrain the lowest. Businesses in Turkey maintained the highest cash holdings, contrasting Morocco with the lowest. Such conditions indicate that Morocco recorded the highest ESG score and lowest cash holdings, which is considered normal and in line with the research findings. The research also found that companies in Bahrain and Oman actually used cash holdings as a substitute for ESG reports, while companies in Malaysia and Turkey used cash holdings as a result of ESG.
During the pandemic, companies with lower ESG scores tended to accumulate more money in cash. Meanwhile, small businesses in Egypt, Indonesia and Arab countries tended to hold more cash according to transaction motives. In Kuwait, companies with high cash holdings were those that implemented prevention systems, while companies with low cash flow and higher expenses, such as those in Indonesia, Malaysia, Turkey and Arab countries, actually had lower cash levels. The research also shows that Saudi Arabia, with a low R&D score, tended to hold more cash. In fact, most companies that had a negative correlation with cash holdings were in the discretionary sector, consumption, health and telecommunications.
Based on robustness analysis, corporate sustainability (CS) was found to have a statistically significant correlation with Covid-19 because many Muslim countries attempted to use cash holdings for pandemic prevention purposes, instead of ESG activities. The research also found, therefore, that the correlation between corporate sustainability and cash levels depends on the composition of the sample and the variables within the company, including control variables.
In conclusion, the research found that most companies with a low ESG score actually held more cash, which is consistent with the previous research. The negative correlation between ESG and cash holdings was unaffected by the pandemic. In fact, companies with a higher ESG score in Arab countries maintained higher cash holdings, while companies with higher ESG scores in Malaysia and Turkey maintained lower cash holdings. The ESG score was also found to have a negative correlation with cash holdings in all industries, except the energy industry.
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