As one of the most liquid assets, cash is an important part of firm liquidity management and financial decisions. Recently, the environmental regulations have been continuously strengthened in China, which increases the likelihood of firms being penalized by environmental protection authorities. As a specific form of environmental regulation, environmental penalties impact directly on firms’ cash holding decision, due to the fact that firms need to respond timely to ensure business operations. From the perspective of environmental regulation, as well as the theory of firm cash holding motivation, we test whether firms would like to increase their cash holding when they have been penalized by the environmental protection authorities, using the samples from A share listed companies in mainland China from 2010—2019 and the publicly disclosed information of firms’ environmental penalty. The results show that firms significantly increase their cash holding when receiving penalties from the environmental protection authorities. The analysis of plausible channels shows that the increase of uncertainty, as well as the prevention motivations, including reputation, risk aversion and resource seeking motivation are the main drivers to the increase of cash holding.