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Uncertainty Determinants of Corporate Liquidity

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Author Info
Christopher F. Baum
Mustafa Caglayan
Andreas Stephan
Oleksandr Talavera

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Abstract

This paper investigates the link between the optimal level of non-financial firms' liquid assets and uncertainty. We develop a partial equilibrium model of precautionary demand for liquid assets showing that firms alter their liquidity ratio in response to changes in either macroeconomic or idiosyncratic uncertainty. We test this hypothesis using a panel of non-financial US firms drawn from the COMPUSTAT quarterly database covering the period 1993-2002. The results indicate that firms increase their liquidity ratios when macroeconomic uncertainty or idiosyncratic uncertainty increases.

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Publisher Info
Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 633.

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Length: 32 p.
Date of creation: 2006
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Handle: RePEc:diw:diwwpp:dp633

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Related research
Keywords: liquidity uncertainty non-financial firms dynamic panel data

Other versions of this item:

Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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