The Impact of Macroeconomic Uncertainty on Cash Holdings for Non–Financial Firms

This paper investigates the effects of macroeconomic volatility on non–financial firms’ cash holding behavior. Using an augmented cash buffer–stock model, we demonstrate that an increase in macroeconomic volatility will cause the cross–sectional distribution of firms’ cash–to–asset ratios to narrow. We test this prediction on a panel of non–financial firms drawn from the annual COMPUSTAT database covering the period 1970–2000, and find that as macroeconomic uncertainty increases, firms behave more homogeneously. Our results are shown to be robust to the inclusion of the levels of several macroeconomic factors.