Causality between liquidity management and profitability: evidence from Indian CPSEs

Abstract

This study comprehensively excavates the general relationship and causality between liquidity management and corporate profitability for Indian CPSEs (central public sector enterprises). Liquidity indices like current ratio, liquid ratio, absolute liquid ratio and cash conversion cycle are taken as explanatory variables, whereas, age of creditors, age of debtors, age of inventory and the natural logarithm of sales are taken as control variables. Profitability is measured in terms of return on total assets. The sample size is restricted to 48 Indian CPSEs listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) of India and the secondary data for analysis is retrieved from CMIE (Centre for Monitoring Indian Economy) for a ten-year period from 2002–2003 to 2011–2012. Statistical and econometric tools like, descriptive statistics, unit root test, fixed effects regression model and Granger causality test are employed in the study. Granger causality test suggests the evidence of feedback causality running between current ratio, liquid ratio, absolute liquid ratio and cash conversion cycle with return on total assets, while, unidirectional causality is found to be running from firms’ size to return on total assets.