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The impact of macroeconomic uncertainty on non-financial firms' demand for liquidity

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  • Baum, Christopher F.
  • Caglayan, Mustafa
  • Ozkan, Neslihan
  • Talavera, Oleksandr

Abstract

This paper empirically investigates whether changes in macroeconomic volatility affect the efficient allocation of non-financial firms' liquid assets. We argue that higher uncertainty will hamper managers' ability to accurately predict firm-specific information and induce them to implement similar cash management policies. Contrarily, when the macroeconomic environment becomes more tranquil, each manager will have the latitude to behave more idiosyncratically as she can adjust liquid assets based on the specific requirements of the firm, bringing about a more efficient allocation of liquid assets. Our empirical analysis provides support for these predictions.

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Bibliographic Info

Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 15 (2006)
Issue (Month): 4 ()
Pages: 289-304

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Handle: RePEc:eee:revfin:v:15:y:2006:i:4:p:289-304

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Web page: http://www.elsevier.com/locate/inca/620170

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References

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  1. Adrian Pagan, 1985. "Two Stage and Related Estimators and Their Applications," Cowles Foundation Discussion Papers 741, Cowles Foundation for Research in Economics, Yale University.
  2. Beaudry, P. & Caglayan, M. & Schiantarelli, F., 1996. "Monetary Instability, the Predictability of Prices and the Allocation of Investment: An Empirical Investigation Using UK Panel Data," UBC Departmental Archives 96-04, UBC Department of Economics.
  3. Mustafa Caglayan & Neslihan Ozkan & Christopher F Baum, 2002. "The Impact of Macroeconomic Uncertainty on Bank Lending Behavior," Research Papers 2002_02, University of Liverpool Management School.
  4. Christopher F Baum & Sylvia Hristakeva, 2001. "DENTON: Stata module to interpolate a flow or stock series from low-frequency totals via proportional Denton method," Statistical Software Components S422501, Boston College Department of Economics, revised 12 Aug 2011.
  5. Jacob A. Frenkel & Boyan Jovanovic, 1981. "On Transactions and Precautionary Demand For Money," NBER Working Papers 0288, National Bureau of Economic Research, Inc.
  6. Ozkan, Aydin & Ozkan, Neslihan, 2004. "Corporate cash holdings: An empirical investigation of UK companies," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2103-2134, September.
  7. Kim, Chang-Soo & Mauer, David C. & Sherman, Ann E., 1998. "The Determinants of Corporate Liquidity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 335-359, September.
  8. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
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Citations

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Cited by:
  1. Christopher F. Baum & Atreya Chakraborty & Liyan Han & Boyan Liu, 2012. "The effects of uncertainty and corporate governance on firms’ demand for liquidity," Applied Economics, Taylor and Francis Journals, vol. 44(4), pages 515-525, February.
  2. Halil Ibrahim Aydin & Cafer Kaplan & Mehtap Kesriyeli & Erdal Ozmen & Cihan Yalcin & Serkan Yigit, 2006. "Corporate Sector Financial Structure in Turkey : A Descriptive Analysis," Working Papers 0607, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  3. Mierzejewski, Fernando, 2006. "Liquidity preference as rational behaviour under uncertainty," MPRA Paper 2771, University Library of Munich, Germany.
  4. S. Balcaen & J. Buyze & H. Ooghe, 2009. "Financial distress and firm exit: determinants of involuntary exits, voluntary liquidations and restructuring exits," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/598, Ghent University, Faculty of Economics and Business Administration.
  5. Talavera, Oleksandr & Tsapin, Andriy & Zholud, Oleksandr, 2012. "Macroeconomic uncertainty and bank lending: The case of Ukraine," Economic Systems, Elsevier, vol. 36(2), pages 279-293.
  6. Christopher F. Baum & Mustafa Caglayan & Neslihan Ozkan, 2002. "The second moments matter: The impact of macroeconomic uncertainty on the allocation of loanable funds," Boston College Working Papers in Economics 521, Boston College Department of Economics, revised 31 Aug 2008.
  7. Christopher F. Baum & Mustafa Caglayan & Andreas Stephan & Oleksandr Talavera, 2005. "Uncertainty Determinants of Corporate Liquidity," Boston College Working Papers in Economics 634, Boston College Department of Economics, revised 09 Oct 2006.
  8. Mierzejewski, Fernando, 2007. "An actuarial approach to short-run monetary equilibrium," MPRA Paper 2424, University Library of Munich, Germany.
  9. Cafer Kaplan & Erdal Ozmen & Cihan Yalcin, 2006. "The Determinants and Implications of Financial Asset Holdings of Non-Financial Firms in Turkey : An Emprical Investigation," Working Papers 0606, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  10. Christopher F. Baum & Mustafa Caglayan & Neslihan Ozkan, 2004. "The second moments matter: The response of bank lending behavior to macroeconomic uncertainty," Discussion Papers in Economics 04/13, Department of Economics, University of Leicester.
  11. Christopher F. Baum & Mustafa Caglayan & Neslihan Ozkan, 2003. "The Impact of Macroeconomic Uncertainty on Trade Credit for Non-Financial Firms," Boston College Working Papers in Economics 566, Boston College Department of Economics.
  12. Christopher F. Baum & Dorothea Schäfer & Oleksandr Talavera, 2006. "The Effects of Industry-Level Uncertainty on Cash Holdings: The Case of Germany," Boston College Working Papers in Economics 637, Boston College Department of Economics, revised 05 Aug 2006.
  13. Mustafa Caglayan & Feng Jiang, 2006. "Reexamining the linkages between inflation and output growth: A bivariate ARFIMA-FIGARCH approach," Working Papers 2006_8, Business School - Economics, University of Glasgow.

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