Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/18531 
Year of Publication: 
2006
Series/Report no.: 
DIW Discussion Papers No. 638
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
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.
Subjects: 
Uncertainty
cash holdings
liquidity
non-financial firms
JEL: 
L14
G31
G32
Document Type: 
Working Paper

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