Liquidity-profitability trade-off: A panel study of listed non-financial firms in Ghana

Liquidity-profitability trade-off: A panel study of listed non-financial firms in Ghana

Yusheng Kong, Mohammed Musah, Stephen Kwadwo Antwi

This study sought to explore the trade-off between liquidity and the profitability of non-financial firms listed on the Ghana Stock Exchange (GSE). A panel data extracted from the audited and published annual reports of fifteen (15) selected firms for the period 2008 to 2017 was used for the study. In the study, liquidity was surrogated by the Cash Flow Ratio (CFR) and the Cash Ratio (CaR), whilst profitability was proxied by Return on Capital Employed (ROCE). After undertaken some diagnostic and specification tests to address the basic assumptions of the Classical Linear Regression Model (CLRM), the study uncovered that, cash flow ratio had a significantly positive effect on the firms’ profitability as measured by ROCE [β= 0.1050416,(p= 0.038)< 0.05], but the cash ratio had an insignificantly negative influence on the firms’ profitability as measured by ROCE [β=-0.0805403,(p= 0.306)> 0.05]. It was further discovered that, the cash flow ratio and the cash ratio had a combined significant effect on the firms’ profitability as measured by ROCE [Wald chi2 (1)= 7.43,(p= 0.0244)< 0.05]. In order to ensure continuous survival and success, the firms should not play with the issue of liquidity management. The entities are expected to maintain an optimal liquidity level that will be capable of performing the ‘twin’role of meeting their financial obligations and at the same time maximizing their shareholders’ wealth. This optimal liquidity level could be obtained if the establishments are to meet the standards set by the Ghana Stock Exchange (GSE). Adhering to these standards will help the firms to reduce the cases of financial distress. In other words, the firms should …

2019

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English