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

Christopher Baum (), Mustafa Caglayan (), Neslihan Ozkan and Oleksandr Talavera

No 552, Boston College Working Papers in Economics from Boston College Department of Economics

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.

Keywords: Cash holdings; macroeconomic uncertainty; time series; ARCH; non-financial firms. (search for similar items in EconPapers)
JEL-codes: E32 G31 M21 (search for similar items in EconPapers)
Date: 2002-12-23, Revised 2005-12-15
Note: Previously circulated as "The Impact of Macroeconomic Uncertainty on Cash Holdings for Non-Financial Firms"
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Published, Review of Financial Economics, 15, 289-304, 2006.

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Related works:
Journal Article: The impact of macroeconomic uncertainty on non-financial firms' demand for liquidity (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:boc:bocoec:552

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