Abstract
The main aim of the paper is to determine the relationship between profitability and financial liquidity of a company using meta-analysis. This method is based on a synthesis of many previous studies with the application of econometric tools. The results of the study show that, taking into account 16 economies, it is not possible to identify a common effect describing the relationship between the profitability of enterprises and their financial liquidity measured by the current liquidity ratio. The results of individual empirical studies that underlie the meta-analysis are diverse. This means that there are moderators of the strength and direction of this dependence associated with macroeconomic and institutional conditions. We attempted to separate them by means of meta-regression. This method involves the use of a regression model, where data are derived from both meta-analysis and external sources. We diagnosed two statistically significant moderators of the strength and direction of the relationship between profitability and liquidity. These are two factors: (i) private sector crediting and (ii) capital market development. Our paper contributes to the development of the existing knowledge by summarizing and binding previous individual empirical studies on the relationship between profitability and liquidity of enterprises and identifying factors affecting this relationship. This knowledge can assist financial managers in making more efficient decisions related to liquidity and working capital management.
Highlights
The company’s short-term financial policy is focused on two main goals
The relationship between the profitability and liquidity of the enterprise becomes an important issue from the point of view of the efficiency of working capital management
The dominant direction of research in the literature on effectiveness of working capital management is the analysis of the relationship between profitability and components of the operating cycle of an enterprise
Summary
The company’s short-term financial policy is focused on two main goals. The basic short-term financial objective of each company is to maximize the excess of revenues over costs. Many authors argue that such short-term financial decisions are a key determinant of a company’s success or failure (Jose 1996; Kroes and Manikas 2014; Smith 1980) In this context, the relationship between the profitability and liquidity of the enterprise becomes an important issue from the point of view of the efficiency of working capital management. The general overview of the articles collected in Annex 1 shows that both the strength and the direction of the diagnosed relationships between profitability and liquidity are diverse This means that, in addition to the factors shaping this relationship at the enterprise level, there may be moderators resulting from the environment in which the company operates. This is confirmed by many previous empirical studies
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