The Effects of Industry-Level Uncertainty on Cash Holdings: The Case of Germany

Christopher Baum (), Dorothea Schäfer and Oleksandr Talavera

No 637, Boston College Working Papers in Economics from Boston College Department of Economics

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.

Keywords: Uncertainty; cash holdings; liquidity; non-financial firms (search for similar items in EconPapers)
JEL-codes: G31 G32 L14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-fin
Date: 2006-02-13, Revised 2006-08-05
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Working Paper: The Effects of Industry-Level Uncertainty on Cash Holdings: The Case of Germany (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:boc:bocoec:637

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