The impact of liquidity on the capital structure: a case study of Croatian firms

Nataša Šarlija,Martina Harc

doi:10.2478/v10305-012-0005-1

Nataša Šarlija, Martina Harc

Open Access

https://doi.org/10.2478/v10305-012-0005-1

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Abstract

The impact of liquidity on the capital structure: a case study of Croatian firms Background: Previous studies have shown that in some countries, liquid assets increased leverage while in other countries liquid firms were more frequently financed by their own capital and therefore were less leveraged. Objectives: The aim of this paper is to investigate the impact of liquidity on the capital structure of Croatian firms. Methods/Approach: Pearson correlation coefficient is applied to the test on the relationship between liquidity ratios and debt ratios, the share of retained earnings to capital and liquidity ratios and the relationship between the structure of current assets and leverage. Results: A survey has been conducted on a sample of 1058 Croatian firms. There are statistically significant correlations between liquidity ratios and leverage ratios. Also, there are statistically significant correlations between leverage ratios and the structure of current assets. The relationship between liquidity ratios and the short-term leverage is stronger than between liquidity ratios and the long-term leverage. Conclusions: The more liquid assets firms have, the less they are leveraged. Long-term leveraged firms are more liquid. Increasing inventory levels leads to an increase in leverage. Furthermore, increasing the cash in current assets leads to a reduction in the short-term and the long-term leverage.

Highlights

Capital structure refers to the way a firm is financing its assets through a combination of equity and debt (Titman and Wessels, 1988)
In order to examine the relationship between liquidity and leverage, correlation coefficients between the liquidity ratios and leverage ratios are calculated
Previous studies that were investigating the impact of liquidity on the capital structure of the firms showed that in some countries liquid assets increases leverage of the firms while in some countries the more liquid firms are more financed with its own capital and less leveraged as Lipson and Mortal (2009) showed in their research based on American companies

Summary

Introduction

Capital structure refers to the way a firm is financing its assets through a combination of equity and debt (Titman and Wessels, 1988). It can be measured as the ratio between debt and total of equity and liabilities (Myers, 2001). There are statistically significant correlations between liquidity ratios and leverage ratios. There are statistically significant correlations between leverage ratios and the structure of current assets. Increasing the cash in current assets leads to a reduction in the short-term and the longterm leverage

Objectives

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Results

Conclusion