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 1957 - 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.
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