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The impact of macroeconomic uncertainty on non‐financial firms' demand for liquidity
Author(s) -
Baum Christopher F.,
Caglayan Mustafa,
Ozkan Neslihan,
Talavera Oleksandr
Publication year - 2006
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2006.01.002
Subject(s) - market liquidity , volatility (finance) , economics , cash , monetary economics , cash flow , finance , business
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.