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The Impact of Macroeconomic Uncertainty on Non-Financial Firms' Demand for Liquidity

Author

Listed:
  • Christopher F. Baum

    () (Boston College
    DIW Berlin)

  • Mustafa Caglayan

    (University of Sheffield)

  • Neslihan Ozkan

    () (University of Bristol)

  • Oleksandr Talavera

    () (DIW Berlin)

Abstract

This paper empirically investigates whether changes in macroeconomic volatility affect the efficient allocation of non-financial firms' liquid assets. We argue that higher uncertainty will hamper managers' ability to accurately predict firm-specific information and induce them to implement similar cash management policies. Contrarily, when the macroeconomic environment becomes more tranquil, each manager will have the latitude to behave more idiosyncratically as she can adjust liquid assets based on the specific requirements of the firm, bringing about a more efficient allocation of liquid assets. Our empirical analysis provides support for these predictions.

Suggested Citation

  • Christopher F. Baum & Mustafa Caglayan & Neslihan Ozkan & Oleksandr Talavera, 2002. "The Impact of Macroeconomic Uncertainty on Non-Financial Firms' Demand for Liquidity," Boston College Working Papers in Economics 552, Boston College Department of Economics, revised 15 Dec 2005.
  • Handle: RePEc:boc:bocoec:552
    Note: Previously circulated as "The Impact of Macroeconomic Uncertainty on Cash Holdings for Non-Financial Firms"
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Cash holdings; macroeconomic uncertainty; time series; ARCH; non-financial firms.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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