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Uncertainty Determinants of Corporate Liquidity

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  • Christopher F. Baum
  • Mustafa Caglayan
  • Andreas Stephan
  • Oleksandr Talavera

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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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.44844.de/dp633.pdf
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Bibliographic 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
Date of revision:
Handle: RePEc:diw:diwwpp:dp633

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Keywords: liquidity; uncertainty; non-financial firms; dynamic panel data;

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References

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Citations

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Cited by:
  1. Balcaen, S. & Manigart, S. & Ooghe, H., 2009. "From Distress to exit: determinants of the time to exit," Vlerick Leuven Gent Management School Working Paper Series, Vlerick Leuven Gent Management School 2009-12, Vlerick Leuven Gent Management School.
  2. 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 & Francis Journals, Taylor & Francis Journals, vol. 44(4), pages 515-525, February.
  3. Mustafa Caglayan & Abdul Rashid, 2013. "The Response of Firms' Leverage to Risk: Evidence from UK Public versus Non-Public ManufacturingFirms," CFI Discussion Papers, Centre for Finance and Investment, Heriot Watt University 1302, Centre for Finance and Investment, Heriot Watt University.
  4. Christopher F. Baum & Mustafa Caglayan & Oleksandr Talavera, 2013. "The Effects of Future Capital Investment and R&D Expenditures on Firms' Liquidity," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 459-474, 08.
  5. Brufman, Leandro & Martinez, Lisana & Artica, Rodrigo Perez, 2013. "What are the causes of the growing trend of excess savings of the corporate sector in developed countries ? an empirical analysis of three hypotheses," Policy Research Working Paper Series 6571, The World Bank.
  6. Ramírez, Andrés & Tadesse, Solomon, 2009. "Corporate cash holdings, uncertainty avoidance, and the multinationality of firms," International Business Review, Elsevier, Elsevier, vol. 18(4), pages 387-403, August.
  7. Caglayan, Mustafa & Xu, Bing, 2014. "Allocation effects of uncertainty on resources in Japan," Economics Letters, Elsevier, Elsevier, vol. 122(1), pages 23-26.
  8. Christopher F Baum & Mustafa Caglayan & Oleksandr Talavera, 2010. "Corporate Liquidity Management and Future Investment Expenditures," University of East Anglia Applied and Financial Economics Working Paper Series, School of Economics, University of East Anglia, Norwich, UK. 001, School of Economics, University of East Anglia, Norwich, UK..

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