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Uncertainty Determinants of Corporate Liquidity

  • Christopher F. Baum


    (Boston College
    DIW Berlin)

  • Mustafa Caglayan

    (University of Sheffield)

  • Andreas Stephan

    (Europa-Universitat Viadrina
    DIW Berlin)

  • Oleksandr Talavera


    (Aberdeen Business School)

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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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 634.

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Date of creation: 07 Dec 2005
Date of revision: 09 Oct 2006
Publication status: published, Economic Modelling, 25 (2008), pp. 833-849
Handle: RePEc:boc:bocoec:634
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