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The Effects of Uncertainty and Corporate Governance on Firms' Demand for Liquidity

  • Christopher F. Baum

    ()

    (Boston College
    DIW Berlin)

  • Atreya Chakraborty

    ()

    (University of Massachusetts-Boston)

  • Liyan Han

    (Beihang University)

  • Boyan Liu

    (Beihang University)

We find that U.S. corporations' demand for liquidity is sensitive to two important factors: uncertainty facing the firm and the quality of corporate governance. Following prior research, we find that both factors have important influences on firms' cash holdings. Our results also indicate that the interactions between uncertainty and governance measures are significant. From a policy perspective, these new findings indicate both governance and the nature of uncertainty may play an important role in managing liquidity risks. Policy recommendations may not only be limited to changes in financial policy but may also include changes in corporate governance.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 726.

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Date of creation: 11 Nov 2009
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Publication status: Published, Applied Economics, 44:4, 515-525, 2012
Handle: RePEc:boc:bocoec:726
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