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The Impact of Macroeconomic Uncertainty onNon-Financial Firms’ Demandf or Liquidity

By Christopher F Baum, Mustafa Caglayan, Neslihan Ozkan and Oleksandr Talavera

Abstract

This paper empirically investigates whether changes in macroeconomic volatility affect the effcient 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 manger 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.

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