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

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  • Christopher F. Baum
  • Dorothea Schäfer
  • Oleksandr Talavera

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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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.44834.de/dp638.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 638.

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Length: 20 p.
Date of creation: 2006
Date of revision:
Handle: RePEc:diw:diwwpp:dp638

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

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References

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  17. Ciaran Driver & Paul Temple & Giovanni Urga, 2005. "Profitability, capacity, and uncertainty: a model of UK manufacturing investment," Oxford Economic Papers, Oxford University Press, vol. 57(1), pages 120-141, January.
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Citations

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

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