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

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  • Christopher F. Baum

    ()
    (Boston College
    DIW Berlin)

  • Dorothea Schäfer

    ()
    (DIW Berlin)

  • Oleksandr Talavera

    ()
    (DIW Berlin)

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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Bibliographic 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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Keywords: Uncertainty; cash holdings; liquidity; non-financial firms;

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References

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Cited by:
  1. Bigelli, Marco & Sánchez-Vidal, Javier, 2012. "Cash holdings in private firms," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 26-35.
  2. 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.

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