The impact of macroeconomic uncertainty on non‐financial firms' demand for liquidity

Abstract

This paper empirically investigates whether changes in macroeconomic volatility affect the efficient allocation of non‐financial firms' liquid assets. We argue that higher uncertainty will hamper managers' ability to accurately predict firm‐specific information and induce them to implement similar cash management policies. Contrarily, when the macroeconomic environment becomes more tranquil, each manager will have the latitude to behave more idiosyncratically as she can adjust liquid assets based on the specific requirements of the firm, bringing about a more efficient allocation of liquid assets. Our empirical analysis provides support for these predictions.

Growth, bank credit, and inflation in Mexico: evidence from an ARDL-bounds testing approach

“…Steady state inflation leads to diminished real activity (Huybens and Smith 1999), because inflation distorts the credit allocation process and deteriorates credit quality when the financial sector is unable to distinguish good borrowers from bad ones (De Gregorio and Sturzenegger 1994) 5 . Baum et al (2006Baum et al ( , 2009 prove that under higher and volatile inflation (macroeconomic uncertainty) banks and firms display homogenous behavior in the sense of reducing supply and demand for loans, respectively (see also Talavera et al 2012). 2.…”

Uncertainty, Incentive and Over/Under-Investment

“…In the company's investment decision-making, the NPV of the investment project needs to consider various parameters such as project cycle, discount rate, future cash inflow, etc. The uncertainty of the macro environment undermines the ability of executives to predict the firm-specific information [11], which leads to the difficulty of executives in estimating these parameters, will influence executive decision making, so that executives can not effectively identify investment opportunities and become more cautious in making investment decisions [13].…”

“…Specific to the company's investment behavior, it may reduce the company executives inefficient investment behavior. However, Baum and Ozkan [11] pointed out that executive holdings are related to the company's future growth opportunities, and further argue that executive holdings are related to the company's Investment Opportunity Set.…”

Corporate Investment and Cash-Flow Sensitivity: Evidence from a Jasmin Revolution Period in Tunisian Market

“…In turn, Aggarwal and Zong (2006) argue that firms characterized by financial constraints have higher cash flow investment sensitivity than firms not financially constrained. Baum et al (2006) show that when macroeconomic conditions are volatile, managers have a more conservative behavior by increasing the company's cash position to finance their investments. The authors explain their results by the low ability of managers to forecast cash flow when the economy is not stable.…”