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The Effects of Industry-Level Uncertainty on Cash Holdings: The Case of Germany

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Author Info
Christopher F. Baum () (Boston College)
Dorothea Schaefer () (DIW Berlin)
Oleksandr Talavera () (DIW Berlin)

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Abstract

This paper investigates the link between the optimal level of non-financial firms' liquid assets and industry-level uncertainty. We develop a structural model of a firm's value maximization problem that predicts that as industry-level uncertainty increases the firm will increase its optimal level of liquidity. We test this hypothesis using a panel of German firms drawn from the Bundesbank's balance sheet database and show that greater uncertainty at the industry level causes firms to increase their cash holdings. The strength of these effects differ among subsamples of the firms with different characteristics.

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Publisher Info
Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 637.

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Length: 20 pages
Date of creation: 13 Feb 2006
Date of revision: 05 Aug 2006
Handle: RePEc:boc:bocoec:637

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Related research
Keywords: Uncertainty cash holdings liquidity non-financial firms

Other versions of this item:

Find related papers by JEL classification:
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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  3. 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. [Downloadable!] (restricted)
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    Other versions:
  6. von Kalckreuth, Ulf, 2000. "Exploring the role of uncertainty for corporate investment decisions in Germany," Discussion Paper Series 1: Economic Studies 2000,05, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
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  14. Simon Gilchrist & Charles Himmelberg, 1998. "Investment, Fundamentals and Finance," NBER Working Papers 6652, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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