The Impact of Macroeconomic Uncertainty on Cash Holdings for Non-Financial Firms

38 Pages Posted: 13 Jun 2004 Last revised: 14 Aug 2008

See all articles by Christopher F. Baum

Christopher F. Baum

Boston College - Department of Economics

Mustafa O. Caglayan

University of Sheffield

Neslihan Ozkan

University of Bristol - School Accounting and Finance, U.K.

Oleksandr Talavera

University of Birmingham

Date Written: 2004

Abstract

This paper investigates the effects of macroeconomic volatility on nonfinancial firms' cash holding behavior. Using an augmented cash buffer-stock model, we demonstrate that an increase in macroeconomic volatility will cause the cross-sectional distribution of firms' cash-to-asset ratios to narrow. We test this prediction on a panel of non-financial firms drawn from the annual COMPUSTAT database covering the period 1957-2000, and find that as macroeconomic uncertainty increases, firms behave more homogeneously. Our results are shown to be robust to the inclusion of the levels of several macroeconomic factors.

Keywords: Cash holdings, macroeconomic uncertainty, time series, ARCH, non-financial firms

JEL Classification: E40

Suggested Citation

Baum, Christopher (Kit) F. and Caglayan, Mustafa O. and Ozkan, Neslihan and Talavera, Oleksandr, The Impact of Macroeconomic Uncertainty on Cash Holdings for Non-Financial Firms (2004). ZEW - Centre for European Economic Research Discussion Paper No. 04-010, Available at SSRN: https://ssrn.com/abstract=555952 or http://dx.doi.org/10.2139/ssrn.555952

Christopher (Kit) F. Baum (Contact Author)

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3673 (Phone)
617-552-2308 (Fax)

Mustafa O. Caglayan

University of Sheffield ( email )

17 Mappin Street
Sheffield, Sheffield S1 4DT
United Kingdom

Neslihan Ozkan

University of Bristol - School Accounting and Finance, U.K. ( email )

United Kingdom

HOME PAGE: http://https://research-information.bris.ac.uk/en/persons/neslihan-ozkan

Oleksandr Talavera

University of Birmingham ( email )

Edgbaston, Birmingham B15 2TT
United Kingdom

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