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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 change their liquidity ratio in response to changes in either macroeconomic or idiosyncratic uncertainty. We test this proposition 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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Bibliographic Info

Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2006_1.

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Date of creation: Jan 2006
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Handle: RePEc:gla:glaewp:2006_1

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Cited by:
  1. Mustafa Caglayan & Abdul Rashid, 2013. "The Response of Firms' Leverage to Risk: Evidence from UK Public versus Non-Public ManufacturingFirms," CFI Discussion Papers 1302, Centre for Finance and Investment, Heriot Watt University.
  2. Ramírez, Andrés & Tadesse, Solomon, 2009. "Corporate cash holdings, uncertainty avoidance, and the multinationality of firms," International Business Review, Elsevier, vol. 18(4), pages 387-403, August.
  3. 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.
  4. Christopher F. Baum & Atreya Chakraborty & Liyan Han & Boyan Liu, 2009. "The Effects of Uncertainty and Corporate Governance on Firms' Demand for Liquidity," Boston College Working Papers in Economics 726, Boston College Department of Economics.
  5. Caglayan, Mustafa & Xu, Bing, 2014. "Allocation effects of uncertainty on resources in Japan," Economics Letters, Elsevier, vol. 122(1), pages 23-26.
  6. 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.
  7. S. Balcaen & S. Manigart & H. Ooghe, 2009. "From distress to exit: determinants of the time to exit," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/588, Ghent University, Faculty of Economics and Business Administration.
  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 001, School of Economics, University of East Anglia, Norwich, UK..

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