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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.

Suggested Citation

  • Christopher F. Baum & Dorothea Schäfer & Oleksandr Talavera, 2006. "The Effects of Industry-Level Uncertainty on Cash Holdings: The Case of Germany," Discussion Papers of DIW Berlin 638, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp638
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    Cited by:

    1. Balcaen,S. & Buyze, J. & Ooghe,H., 2009. "Financial distress and firm exit: determinants of involuntary exits, voluntary liquidations and restructuring exits," Vlerick Leuven Gent Management School Working Paper Series 2009-21, Vlerick Leuven Gent Management School.
    2. Bigelli, Marco & Sánchez-Vidal, Javier, 2012. "Cash holdings in private firms," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 26-35.
    3. Cui, Di & Ding, Mingfa & Han, Yikai & Suardi, Sandy, 2022. "Foreign shareholders, relative foreign policy uncertainty and corporate cash holdings," International Review of Financial Analysis, Elsevier, vol. 84(C).

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    More about this item

    Keywords

    Uncertainty; cash holdings; liquidity; non-financial firms;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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