The 4 reference contexts in paper Christopher F. Baum, Mustafa Caglayan, Andreas Stephan, Oleksandr Talavera (2005) “Uncertainty Determinants of Corporate Liquidity” / RePEc:boc:bocoec:634

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    Kim and Sherman (1998) indicate that firms increase investment in liquid assets in response to increase in the cost of external financing, the variance of future cash flows or the return on future investment opportunities.4
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    Harford (1999)
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    argues that corporations with excessive cash holdings are less likely to be takeover targets. Almeida, Campello and Weisbach (2004) develop a liquidity demand model where firms have access to investment opportunities but cannot finance them.
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    In this paper, we complement Baum et al. (2006) by investigating the impact of macroeconomic uncertainty as well as idiosyncratic uncertainty on the cash holding behavior of non-financial firms. We provide a theoretical and empirical investigation of the firm’s deci4See also Opler, Pinkowitz, Stulz and Williamson (1999), Mills, Morling and Tease (1994) and
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    Bruinshoofd (2003).
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    5See also Gertler and Gilchrist (1994) on the effects of monetary policy on financial policies regarding the use of debt. 6In a recent paper Bo and Lensink (2005) suggests that presence of uncertainty factors changes the structural parameters of the Q-model of investment. sion to hold liquid assets.
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    ˆst=γ1LIt+γ2E[ˆR]t+1(13) 14We proxy the firm’s capital stockKwith total assets,TA. 14 whereLItis the index of leading indicators: a measure of overall economic health.E[R]t+1 is the firm’s expected return on investment. Both a stronger economic environment and a higher expected return on investment increase the firm’s probability of acquiring sufficient credit if threatened with bankruptcy (see
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    Altman (1968),
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    Liu (2004)). Substituting the parameterized expressions into equation (6) yields Cˆ=α1ζ1ˆCt−1+α1ζ2ˆIt−1+ζ3ˆψt−1+ (α2+α5γ2)θ (̂S TA ) t+1 +α3β21ˆτ2t +α3β22ˆ-2t+α4δTBt+α5γ1LIt+ (α2+α5γ2)(κ+ω+ν). After normalization of cash holdings, debt and investment by total assets we derive our econometric model specification for firmiat timet: (̂Cit TAit ) =φ0+φ1 (̂Cit−1 TAit−1 ) +φ2 (̂Iit−1 TAit−1 ) +φ3 (̂Sit+
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    Small firms also have a much larger coefficient for idiosyncratic uncertainty. The greater sensitivity of small firms could be explained by the fact that smaller firms are more likely to be financially constrained. As
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    Almeida et al. (2004)
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    indicate, financially unconstrained firms have no precautionary motive to hold cash; their cash holding policies are indeterminate. In contrast, for financially constrained firms, any change in the level of uncertainty that affects managers’ ability to predict cash flows should cause them to alter their demand for liquidity.
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