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TITLE:
Uncertainty Determinants of Corporate Liquidity

AUTHOR(S):
Christopher F. Baum, Boston College
Mustafa Caglayan, University of Glasgow
Andreas Stephan, Europa-Universitat Viadrina
Oleksandr Talavera, DIW Berlin

DOCUMENT TYPE: Article

ABSTRACT:
This paper investigates the link between the optimal level of non-financial firms' liquid assets and uncertainty. We develop a partial equilibrium model of precautionary demand for liquid assets showing that firms change their liquidity ratio in response to changes in uncertainty. We test this proposition using a panel of non-financial US firms drawn from the COMPUSTAT quarterly database covering the period 1993--2002. The results indicate that firms increase their liquidity ratios when macroeconomic uncertainty or idiosyncratic uncertainty increases. We demonstrate that our results are robust with respect to the inclusion of interest rates and the index of leading indicators.