Sustainable investment conditions and corporate cash holdings in the MENA region: Market preparedness and Shari'ah-compliant funds

Abstract

We employ firm-level data to investigate how sustainable investment conditions impact the cash-holding decisions of firms operating in the Middle East and North Africa. We introduce an innovative measure of sustainable investment conditions based on the degree of market preparedness to attract sustainable investments, and the percentage of managed assets eligible for sustainable investment. We further distinguish between conventional assets and Shariah-compliant managed assets. To account for potential confounding factors, we incorporate firm-specific and country-wide controls and perform endogeneity analysis. We find a robust inverse relationship between market preparedness and corporate cash holding. The impact of market preparedness depends on the firm's size and can manifest through both direct and indirect channels. However, the relationship between funds under management qualifying for sustainable investment and cash holdings is less straightforward. Our results underscore the influence of sustainability policies on firms' liquidity decision-making. These policies' effects are contingent on a broader institutional landscape. Our analysis implies that policies to promote market preparedness should be enhanced and that sustainable investment inflows into the region could be moderately increased by incorporating ESG criteria into the rules of Shari'ah-compliant funds.

Keywords: Cash holdings, Corporate governance, Institutions, Sustainable investment conditions