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The Impact of Macroeconomic Uncertainty on Non-Financial Firms' Demand for Liquidity

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Author Info

  • Christopher F. Baum

    ()
    (Boston College
    DIW Berlin)

  • Mustafa Caglayan

    (University of Sheffield)

  • Neslihan Ozkan

    ()
    (University of Bristol)

  • Oleksandr Talavera

    ()
    (DIW Berlin)

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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File URL: http://fmwww.bc.edu/EC-P/wp552.pdf
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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 552.

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Length: 34 pages
Date of creation: 23 Dec 2002
Date of revision: 15 Dec 2005
Publication status: Published, Review of Financial Economics, 15, 289-304, 2006.
Handle: RePEc:boc:bocoec:552

Note: Previously circulated as "The Impact of Macroeconomic Uncertainty on Cash Holdings for Non-Financial Firms"
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Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Phone: 617-552-3670
Fax: +1-617-552-2308
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Web page: http://fmwww.bc.edu/EC/
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Related research

Keywords: Cash holdings; macroeconomic uncertainty; time series; ARCH; non-financial firms.;

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References

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  1. 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.
  2. 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 17 Jul 2014.
  3. Pagan, Adrian, 1986. "Two Stage and Related Estimators and Their Applications," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 517-38, August.
  4. Paul Beaudry & Mustafa Caglayan & Fabio Schiantarelli, 1996. "Monetary Instability, the Predictability of Prices and the Allocation of Investment: An Empirical Investigation Using UK Panel Data," Boston College Working Papers in Economics 312., Boston College Department of Economics.
  5. Frenkel, Jacob A & Jovanovic, Boyan, 1980. "On Transactions and Precautionary Demand for Money," The Quarterly Journal of Economics, MIT Press, vol. 95(1), pages 25-43, August.
  6. 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.
  7. 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.
  8. 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.
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