- 1
- Alfonsina, I., Leonida, L. and Ozkan, A. (2004), Determinants of financial conservatism: Evidence from low-leverage and cash-rish UK firms, Discussion Paper 2004/01, University of York.

Total in-text references: 1- In-text reference with the coordinate start=16854
- Prefix
- A firm is classified as part of a business group if it reports a business group identification number. 4.2 Econometric Results The research design to be used in the current paper is similar to recent papers in this area (e.g.,
- Exact
- Opler, Pinkowitz, Stulz and Williamson (1999), Alfonsina, Leonida and Ozkan (2004), Bruinshoofd and Kool (2004)).
- Suffix
- We derive our econometric model specification for firmiat timet: Cashit T Ait =φ0+φ1 Cashit−1 T Ait−1 +φ2 Iit T Ait +φ3 Sit T Ait +φ4τ2t+κt+ωi+νit(11) The key coefficient of interest isφ4. Our theoretical framework predicts a positive sign indicating that a higher level of the liquidity ratio is associated with a higher level of industry-specific uncertainty.

- In-text reference with the coordinate start=16854
- 2
- Almeida, H., Campello, M. and Weisbach, M. (2004), ‘The cash flow sensitivity of cash’, Journal of Finance59(4), 1777–1804.

Total in-text references: 1- In-text reference with the coordinate start=3609
- Prefix
- Furthermore, managers can increase firm value by managing their cash balances. The cash buffer allows the company to maintain the ability to invest when the company does not have sufficient current cash flows to meet capital investment demands. In their recent study
- Exact
- Almeida, Campello and Weisbach (2004)
- Suffix
- 1http://www.busrep.co.za/index.php?fArticleId=2896664 2In the seminal paper of Modigliani and Miller (1958) cash is considered as a zero net present value investment. There are no benefits from holding cash in a world of perfect capital markets lacking information asymmetries, transaction costs or taxes.

- In-text reference with the coordinate start=3609
- 3
- Baum, C. F., Caglayan, M., Ozkan, N. and Talavera, O. (2006), ‘The impact of macroeconomic uncertainty on non-financial firms’ demand for liquidity’,Review of Financial Economics(in press).

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- Prefix
- They find that financially constrained firms’ cash flow sensitivity increases during recessions, while financially unconstrained firms’ cash flow sensitivity is unaffected by the business cycle. The idea of a precautionary demand for cash is further explored in recent literature.
- Exact
- Baum, Caglayan, Ozkan and Talavera (2006)
- Suffix
- develop a static model of cash management with a signal extraction mechanism. Their model shows a positive relationship between cash holdings, the interest rate on loans and the level of uncertainty.

- In-text reference with the coordinate start=10982
- Prefix
- Sandmo (1971)) then we derive our main theoretical prediction ∂Θt ∂τ2t+1 = ∂Θt ∂Πt+1 ∂Πt+1 ∂wt+1 ∂wt+1 ∂τ2t+1 >0(10) Compared to a certainty equivalent economy, the firm facing higher costs of external financing caused by an increase in industry-level uncertainty increases its level of cash holdings. 3 Uncertainty Measures The industry-level uncertainty identification approach resembles that of
- Exact
- Baum et al. (2006).
- Suffix
- Firms’ liquidity decisions depend on anticipation of future profits and capital investment needs. The manager’s problem of determining the appropriate level of cash 4We use (∂Yt+1/∂Kt)/(∂Yt+1/∂Nt) = (Rt−1)/wt+1. 7 holdings becomes more difficult at higher levels of uncertainty about the industry’s prospects.

- In-text reference with the coordinate start=15232
- Prefix
- Table 2 presents descriptive statistics for (Cash/T A)it, (S/T A)it, (I/T A)itandτ2it variables for the pooled time-series cross-sectional data, 1987–2000. The median for (Cash/T A)tis 2% while the mean is 6%. This ratio is considerably lower in Germany than in the USA. Based onCOMPUSTATdata,
- Exact
- Baum et al. (2006)
- Suffix
- report that US corporations hold over 10% of their total assets in cash. The empirical literature investigating firms’ capital structure behavior has identi6We excluded firms with Opening Balance Sheet (Er ̈offnungsbilanz) or Carcass Balance Sheet (Rumpfbilanz).

- In-text reference with the coordinate start=21958
- Prefix
- Large firms, firms outside business groups, low leverage firms and high investment firms exhibit a much greater sensitivity of their liquid assets ratio to changes in industry-level uncertainty. Our results should be considered in conjunction with those of
- Exact
- Baum et al. (2006)
- Suffix
- 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 industry level uncertainty increases the total amount of cash held by non-financial firms 12 will increase significantly, with negative effects on the economy.

- In-text reference with the coordinate start=4448
- 4
- Blundell, R. and Bond, S. (1998), ‘Initial conditions and moment restrictions in dynamic panel data models’,Journal of Econometrics87(1), 115–143.

Total in-text references: 1- In-text reference with the coordinate start=17717
- Prefix
- We estimate 7See Ozkan and Ozkan (2004). 10 our econometric models using the system dynamic panel data (DPD) estimator. DPD combines equations in differences of the variables with equations in levels of the variables. In this system GMM approach (see
- Exact
- Blundell and Bond (1998)),
- Suffix
- lagged levels are used as instruments for differenced equations and lagged differences are used as instruments for level equations. We report two-step estimates computed with Windmeijer-corrected standard errors from Stata’sxtabond2package.

- In-text reference with the coordinate start=17717
- 5
- Bo, H. and Lensink, R. (2005), ‘Is the investment-uncertainty relationship nonlinear? an empirical analysis for the Netherlands’,Economica72(286), 307–331.

Total in-text references: 1- In-text reference with the coordinate start=6311
- Prefix
- The results differ across different categories of firms. The rest of the paper is organized as follows. Section 2 discusses non-financial firms’ motives for cash holdings and reviews the related literature. Section 3 presents our 3
- Exact
- Bo and Lensink (2005)
- Suffix
- suggests that the presence of uncertainty factors changes the structural parameters of the Q-model of investment. 4 measure of industry-level uncertainty, while Section 4 overviews data and discusses our empirical results.

- In-text reference with the coordinate start=6311
- 6
- Bruinshoofd, W. A. and Kool, C. J. M. (2004), ‘Dutch corporate liquidity mangement: New evidence on aggregation’,Journal of Applied Economics0, 195–230.

Total in-text references: 1- In-text reference with the coordinate start=16854
- Prefix
- A firm is classified as part of a business group if it reports a business group identification number. 4.2 Econometric Results The research design to be used in the current paper is similar to recent papers in this area (e.g.,
- Exact
- Opler, Pinkowitz, Stulz and Williamson (1999), Alfonsina, Leonida and Ozkan (2004), Bruinshoofd and Kool (2004)).
- Suffix
- We derive our econometric model specification for firmiat timet: Cashit T Ait =φ0+φ1 Cashit−1 T Ait−1 +φ2 Iit T Ait +φ3 Sit T Ait +φ4τ2t+κt+ωi+νit(11) The key coefficient of interest isφ4. Our theoretical framework predicts a positive sign indicating that a higher level of the liquidity ratio is associated with a higher level of industry-specific uncertainty.

- In-text reference with the coordinate start=16854
- 7
- Byrne, J. P. and Davis, E. P. (2002), Investment and uncertainty in the G7, Discussion papers, National Institute of Economic Research, London.

Total in-text references: 1- In-text reference with the coordinate start=11591
- Prefix
- The literature suggests candidates for uncertainty proxies such as a moving standard deviation (see Ghosal and Loungani (2000)), the standard deviation across 12 forecast periods of output growth and the inflation rate in the next 12 months (see Driver and Moreton (1991)). However, as in
- Exact
- Driver, Temple and Urga (2005) and Byrne and Davis (2002)
- Suffix
- we use a GARCH model for measuring industry-level uncertainty. We argue that this approach is better suited in our case for two reasons. First, industry-level forecasts are not as generally available as are macroeconomic forecasts.

- In-text reference with the coordinate start=11591
- 9
- Driver, C. and Moreton, D. (1991), ‘The influence of uncertainty on aggregate spending’, Economic Journal101, 1452–1459.

Total in-text references: 1- In-text reference with the coordinate start=11549
- Prefix
- The literature suggests candidates for uncertainty proxies such as a moving standard deviation (see Ghosal and Loungani (2000)), the standard deviation across 12 forecast periods of output growth and the inflation rate in the next 12 months (see
- Exact
- Driver and Moreton (1991)).
- Suffix
- However, as in Driver, Temple and Urga (2005) and Byrne and Davis (2002) we use a GARCH model for measuring industry-level uncertainty. We argue that this approach is better suited in our case for two reasons.

- In-text reference with the coordinate start=11549
- 10
- Driver, C., Temple, P. and Urga, G. (2005), ‘Profitability, capacity, and uncertainty: a model of UK manufacturing investment’,Oxford Economic Papers57(1), 120–141.

Total in-text references: 1- In-text reference with the coordinate start=11591
- Prefix
- The literature suggests candidates for uncertainty proxies such as a moving standard deviation (see Ghosal and Loungani (2000)), the standard deviation across 12 forecast periods of output growth and the inflation rate in the next 12 months (see Driver and Moreton (1991)). However, as in
- Exact
- Driver, Temple and Urga (2005) and Byrne and Davis (2002)
- Suffix
- we use a GARCH model for measuring industry-level uncertainty. We argue that this approach is better suited in our case for two reasons. First, industry-level forecasts are not as generally available as are macroeconomic forecasts.

- In-text reference with the coordinate start=11591
- 11
- Ghosal, V. and Loungani, P. (2000), ‘The differential impact of uncertainty on investment in small and large business’,The Review of Economics and Statistics82, 338– 349.

Total in-text references: 1- In-text reference with the coordinate start=11404
- Prefix
- The manager’s problem of determining the appropriate level of cash 4We use (∂Yt+1/∂Kt)/(∂Yt+1/∂Nt) = (Rt−1)/wt+1. 7 holdings becomes more difficult at higher levels of uncertainty about the industry’s prospects. The literature suggests candidates for uncertainty proxies such as a moving standard deviation (see
- Exact
- Ghosal and Loungani (2000)),
- Suffix
- the standard deviation across 12 forecast periods of output growth and the inflation rate in the next 12 months (see Driver and Moreton (1991)). However, as in Driver, Temple and Urga (2005) and Byrne and Davis (2002) we use a GARCH model for measuring industry-level uncertainty.

- In-text reference with the coordinate start=11404
- 12
- Gilchrist, S. and Himmelberg, C. (1998), Investment, fundamentals and finance, NBER

Total in-text references: 1- In-text reference with the coordinate start=7873
- Prefix
- The real cost of adjustingItunits of capital is denoted asC(It, Kt−1). The price of external financing is equal to the base gross interest rate,R(Bt−1, Kt−1) which depends on firm-specific characteristics such as debt and capital stock. Similar to
- Exact
- Gilchrist and Himmelberg (1998),
- Suffix
- we also assumeRB,t>0: i.e., highly indebted firms must pay an additional premium to compensate debt-holders for additional costs 5 because of monitoring or hazard problems. Moreover,RK,t<0: i.e., large firms enjoy a lower risk premium.

- In-text reference with the coordinate start=7873
- 14
- Hartman, R. (1976), ‘Factor demand with output price uncertainty’,American Economic Review66(4), 675–681.

Total in-text references: 1- In-text reference with the coordinate start=10583
- Prefix
- Assuming a Cobb–Douglas production functionYt+1=At+1KαktNαnt+1we rewrite the marginal product of capital∂Yt+1/∂Ktas4 Et[ΠK,t+1] =Et [ Pt+1 μ αkYt+1 Kt ] =Et [ Pt+1(Rt−1) μwt+1 αnYt+1 N+1 ] (9) IfEt[wt+1] is an increasing function of input price volatility,τ2t+1(See
- Exact
- Hartman (1976), Sandmo (1971))
- Suffix
- then we derive our main theoretical prediction ∂Θt ∂τ2t+1 = ∂Θt ∂Πt+1 ∂Πt+1 ∂wt+1 ∂wt+1 ∂τ2t+1 >0(10) Compared to a certainty equivalent economy, the firm facing higher costs of external financing caused by an increase in industry-level uncertainty increases its level of cash holdings. 3 Uncertainty Measures The industry-level uncertainty identification approach resembles that of Baum et al. (200

- In-text reference with the coordinate start=10583
- 15
- Hubbard, R. G. and Kashyap, A. K. (1992), ‘Internal net worth and the investment process: An application to US agriculture’,Journal of Political Economy100(3), 506– 34.

Total in-text references: 1- In-text reference with the coordinate start=6784
- Prefix
- Finally, Section 5 concludes. 2 TheQModel of Firm Value Optimization The theoretical model proposed in this paper is based on the firm value optimization problem and represents a generalization of the standardQmodels of investment by
- Exact
- Whited (1992) and Hubbard and Kashyap (1992).
- Suffix
- The present value of the firm is equated to the expected discounted stream ofDt, dividends paid to shareholders, where βis the discount factor. Vt(Kt) = max {It+s,Bt+s}∞s=0 Dt+Et [∞ ∑ s=1 βt+s−1Dt+s ] ,(1) Kt= (1−δ)Kt−1+It,(2) Dt= Π(Kt−1, Nt)−wtNt−C(It, Kt−1)−It+Bt−Bt−1R(Bt−1, Kt−1),(3) Dt≥0,(4) lim T→∞ T−1∏ j=t βj BT= 0,∀t(5) The firm maximizes equation (1) subject to three constraints.

- In-text reference with the coordinate start=6784
- 16
- Keynes, J. M. (1936),The general theory of employment, interest and money, London, Harcourt Brace.

Total in-text references: 1- In-text reference with the coordinate start=2189
- Prefix
- For example, Google boosted its cash holdings to $7.1 billion during 2005.1Why do firms hold so much cash? Why do non-financial firms invest in zero net present value investment while there are more profitable projects?2
- Exact
- Keynes (1936)
- Suffix
- suggests two main reasons that non-financial firms maintain a positive level of liquid assets. First, firms hold liquid assets to reduce transaction costs. Second, a stock of cash provides a buffer to meet unexpected contingencies.

- In-text reference with the coordinate start=2189
- 18
- Modigliani, F. and Miller, M. (1958), ‘The cost of capital, corporate finance, and the theory of investment’,American Economic Review48(3), 261–297.

Total in-text references: 1- In-text reference with the coordinate start=3724
- Prefix
- The cash buffer allows the company to maintain the ability to invest when the company does not have sufficient current cash flows to meet capital investment demands. In their recent study Almeida, Campello and Weisbach (2004) 1http://www.busrep.co.za/index.php?fArticleId=2896664 2In the seminal paper of
- Exact
- Modigliani and Miller (1958)
- Suffix
- cash is considered as a zero net present value investment. There are no benefits from holding cash in a world of perfect capital markets lacking information asymmetries, transaction costs or taxes. Even in the absence of perfect capital markets firms appear to hold far more cash than any transactions-based model would imply. 3 investigate how macroeconomic shocks affect firms’ cash flow sensitivi

- In-text reference with the coordinate start=3724
- 19
- Myers, S. C. and Majluf, N. S. (1984), ‘Corporate financing and investment decisions when firms have information that investors do not have’,Journal of Financial Economics13, 187–221.

Total in-text references: 1- In-text reference with the coordinate start=3185
- Prefix
- Kim and Sherman (1998) develop a trade-off model of optimal cash holdings where a firm’s cash stock depends on the expected returns on current investment opportunities. Asymmetric information concerning the ability of raising external financing constitutes theprecautionary motivefor holding cash.
- Exact
- Myers and Majluf (1984)
- Suffix
- define cash on hand and marketable securities as financial slack which could be used to overcome the problem of financial constraints. Furthermore, managers can increase firm value by managing their cash balances.

- In-text reference with the coordinate start=3185
- 20
- Opler, T., Pinkowitz, L., Stulz, R. and Williamson, R. (1999), ‘The determinants and implications of cash holdings’,Journal of Financial Economics52, 3–46.

Total in-text references: 1- In-text reference with the coordinate start=16854
- Prefix
- A firm is classified as part of a business group if it reports a business group identification number. 4.2 Econometric Results The research design to be used in the current paper is similar to recent papers in this area (e.g.,
- Exact
- Opler, Pinkowitz, Stulz and Williamson (1999), Alfonsina, Leonida and Ozkan (2004), Bruinshoofd and Kool (2004)).
- Suffix
- We derive our econometric model specification for firmiat timet: Cashit T Ait =φ0+φ1 Cashit−1 T Ait−1 +φ2 Iit T Ait +φ3 Sit T Ait +φ4τ2t+κt+ωi+νit(11) The key coefficient of interest isφ4. Our theoretical framework predicts a positive sign indicating that a higher level of the liquidity ratio is associated with a higher level of industry-specific uncertainty.

- In-text reference with the coordinate start=16854
- 21
- Ozkan, A. and Ozkan, N. (2004), ‘Corporate cash holdings: An empirical investigation of UK companies’,Journal of Banking and Finance28, 2103–2134.

Total in-text references: 1- In-text reference with the coordinate start=17487
- Prefix
- Our theoretical framework predicts a positive sign indicating that a higher level of the liquidity ratio is associated with a higher level of industry-specific uncertainty. Estimates of optimal corporate behavior often suffer from endogeneity problems, and the use of instrumental variables may be considered as a possible solution. We estimate 7See
- Exact
- Ozkan and Ozkan (2004).
- Suffix
- 10 our econometric models using the system dynamic panel data (DPD) estimator. DPD combines equations in differences of the variables with equations in levels of the variables. In this system GMM approach (see Blundell and Bond (1998)), lagged levels are used as instruments for differenced equations and lagged differences are used as instruments for level equations.

- In-text reference with the coordinate start=17487
- 22
- Sandmo, A. (1971), ‘Competitive firm under price uncertainty’,American Economic Review61(2), 65–73. von Kalckreuth, U. (2003), ‘Exploring the role of uncertainty for corporate investment decisions in germany’,Swiss Journal of Economics139(2), 173–206.

Total in-text references: 1- In-text reference with the coordinate start=10583
- Prefix
- Assuming a Cobb–Douglas production functionYt+1=At+1KαktNαnt+1we rewrite the marginal product of capital∂Yt+1/∂Ktas4 Et[ΠK,t+1] =Et [ Pt+1 μ αkYt+1 Kt ] =Et [ Pt+1(Rt−1) μwt+1 αnYt+1 N+1 ] (9) IfEt[wt+1] is an increasing function of input price volatility,τ2t+1(See
- Exact
- Hartman (1976), Sandmo (1971))
- Suffix
- then we derive our main theoretical prediction ∂Θt ∂τ2t+1 = ∂Θt ∂Πt+1 ∂Πt+1 ∂wt+1 ∂wt+1 ∂τ2t+1 >0(10) Compared to a certainty equivalent economy, the firm facing higher costs of external financing caused by an increase in industry-level uncertainty increases its level of cash holdings. 3 Uncertainty Measures The industry-level uncertainty identification approach resembles that of Baum et al. (200

- In-text reference with the coordinate start=10583
- 23
- Whited, T. M. (1992), ‘Debt, liquidity constraints, and corporate investment: Evidence from panel data’,Journal of Finance47(4), 1425–1460. 15 Appendix 1: Construction of the firm-specific measures The following variables are used in the empirical study.

Total in-text references: 1- In-text reference with the coordinate start=6784
- Prefix
- Finally, Section 5 concludes. 2 TheQModel of Firm Value Optimization The theoretical model proposed in this paper is based on the firm value optimization problem and represents a generalization of the standardQmodels of investment by
- Exact
- Whited (1992) and Hubbard and Kashyap (1992).
- Suffix
- The present value of the firm is equated to the expected discounted stream ofDt, dividends paid to shareholders, where βis the discount factor. Vt(Kt) = max {It+s,Bt+s}∞s=0 Dt+Et [∞ ∑ s=1 βt+s−1Dt+s ] ,(1) Kt= (1−δ)Kt−1+It,(2) Dt= Π(Kt−1, Nt)−wtNt−C(It, Kt−1)−It+Bt−Bt−1R(Bt−1, Kt−1),(3) Dt≥0,(4) lim T→∞ T−1∏ j=t βj BT= 0,∀t(5) The firm maximizes equation (1) subject to three constraints.

- In-text reference with the coordinate start=6784