The impact of macroeconomic uncertainty on non-financial firms' demand for liquidity

Christopher F. Baum; Mustafa Caglayan; Neslihan Ozkan; Oleksandr Talavera

doi:10.1016/j.rfe.2006.01.002

The impact of macroeconomic uncertainty on non-financial firms' demand for liquidity

Christopher F. Baum^*, Mustafa Caglayan, Neslihan Ozkan, Oleksandr Talavera

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

124 Citations (Scopus)

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.

Original language	English
Pages (from-to)	289-304
Number of pages	16
Journal	Review of Financial Economics
Volume	15
Issue number	4
DOIs	https://doi.org/10.1016/j.rfe.2006.01.002
Publication status	Published - 2006

Keywords

ARCH
Buffer stock
Cash holdings
Liquid assets
Macroeconomic uncertainty
Non-financial firms

ASJC Scopus subject areas

Finance
Economics and Econometrics

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10.1016/j.rfe.2006.01.002

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title = "The impact of macroeconomic uncertainty on non-financial firms' demand for liquidity",

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.",

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N2 - 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.

AB - 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.

KW - ARCH

KW - Buffer stock

KW - Cash holdings

KW - Liquid assets

KW - Macroeconomic uncertainty

KW - Non-financial firms

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JO - Review of Financial Economics

JF - Review of Financial Economics

IS - 4

ER -

The impact of macroeconomic uncertainty on non-financial firms' demand for liquidity

Abstract

Keywords

ASJC Scopus subject areas

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