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- Almeida, Heitor, Murillo Campello, and Michael Weisbach (2004) ‘The cash flow sensitivity of cash.’Journal of Finance59(4), 1777–1804

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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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- Altman, E. (1968) ‘Financial ratios, discriminant analysis and prediction of corporate bankruptcy.’Journal of Financepp. 261–280

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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), Liu (2004)).
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- 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+1 TAit+1 ) +(

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- Baum, Christopher F., Mustafa Caglayan, Neslihan Ozkan, and Oleksandr Talavera (2006) ‘The impact of macroeconomic uncertainty on non-financial firms’ demand for liquidity.’Review of Financial Economics

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- homogeneously in response to increases in macroeconomic uncertainty.6However, their model implies predictable variations in thecross-sectional distributionof corporate cash holdings and does not make predictions about the individual firm’s optimallevel of liquidity. Furthermore, they do not consider the impact of idiosyncratic uncertainty on the firm’s cash holdings. In this paper, we complement
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- Baum et al. (2006)
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- 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 Bruinshoofd (2003). 5See also Gertler and Gilchrist (1994) on the effects of monetary pol

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- only manufacturing sector firms we obtain on average 700 firms’ quarterly characteristics.15 Descriptive statistics for the quarterly means of cash-to-asset ratios along with investment and sales to asset ratios andψare presented in Table 3. From the means of the sample we see that firms hold about 10 percent of their total assets in cash. This amount is sizable and similar to that reported in
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- Baum et al. (2006).
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- The empirical literature investigating firms’ cash-holding behavior has identified that firm-specific characteristics play an important role.16We might expect that a group of firms with similar characteristics (e.g., those firms with high levels of leverage) might behave similarly, and quite differently from those with differing characteristics.

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- When the macroeconomic environment is less predictable, or when idiosyncratic risk is higher, companies become more cautious and increase their liquidity ratio. Our results should be considered in conjunction with those of
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- Baum et al. (2006)
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- who predict that during periods of higher uncertainty firms behave more similarly in terms of their cash-to-asset ratios. Taken together, these studies allow us to conjecture that as either macroeconomic or idiosyncratic uncertainty increases the total amount of cash held by non-financial firms will increase significantly, with negative effects on the economy.

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- Bo, Hong (2002) ‘Idiosyncratic uncertainty and firm investment.’Australian Economic Papers41(1), 1–14

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- For instance, Bo and Lensink (2005) use three measures: stock price volatility, estimated as the difference between the highest and the lowest stock price normalized by the lowest price; volatility of sales measured by the coefficient of variation of sales over a seven–year window; and the volatility of number of employees estimated similarly to volatility of sales.
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- Bo (2002)
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- employs a slightly different approach, setting up the forecasting AR(1) equation for the underlying uncertainty variable driven by sales and interest rates. The unpredictable part of the fluctuations, the estimated residuals, are obtained from that equation and their three-year moving average standard deviation is computed.

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- Bruinshoofd, W.A. (2003) ‘Corporate investment and financing constraints: Connections with cash management.’ WO Research Memoranda (discontinued) 734, Netherlands

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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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- Harford, J. (1999) ‘Corporate cash reserves and acquisitions.’Journal of Finance 54, 1967–1997

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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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- Kalckreuth, Ulf (2000) ‘Exploring the role of uncertainty for corporate investment decisions in Germany.’ Discussion Papers 5/00, Deutsche Bundesbank - Economic

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- Bo (2002) employs a slightly different approach, setting up the forecasting AR(1) equation for the underlying uncertainty variable driven by sales and interest rates. The unpredictable part of the fluctuations, the estimated residuals, are obtained from that equation and their three-year moving average standard deviation is computed.
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- Kalckreuth (2000)
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- uses cost and sales uncertainty measures, regressing operating costs on sales. The three-month aggregated orthogonal residuals from that regression are used as uncertainty measures. In contrast to the studies cited above, we proxy the idiosyncratic uncertainty by computing the the standard deviation of the closing price for the firm’s shares over the last nine months.

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- Liu, Jia (2004) ‘Macroeconomic determinants of corporate failures: evidence from the UK.’Applied Economics36(9), 939–945

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- Prefix
- 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
- Exact
- Altman (1968), Liu (2004)).
- Suffix
- 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+1 TAit+1 ) +(

- In-text reference with the coordinate start=21292