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

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Author Info

  • Nataša Šarlija

    (Faculty of Economics, J.J. Strossmayer University of Osijek, Osijek, Croatia)

  • Martina Harc

    (Institute for Scientific and Art Research Work, Croatian Academy of Science and Art, Osijek, Croatia)

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    Abstract

    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. Longterm 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 longterm leverage.

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    Bibliographic Info

    Article provided by Society for Promotion of Business Information Technology (BIT) in its journal Business Systems Research.

    Volume (Year): 3 (2012)
    Issue (Month): 1 ()
    Pages: 30-36

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    Handle: RePEc:bit:bsrysr:v:3:y:2012:i:1:p:30-36

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    Postal: Udruga BIT, Faculty of Economics and Business, Trg J. F. Kennedy 6, 10000 Zagreb, Croatia.
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    Keywords: liquidity; capital structure; leverage;

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    References

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    1. Akdal, Sinan, 2010. "How do Firm Characteristics Affect Capital Structure? Some UK Evidence.," MPRA Paper 29657, University Library of Munich, Germany, revised 01 Nov 2010.
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    Cited by:
    1. Fawad Ahmad, 2013. "Corruption and Information Sharing as Determinants of Non-Performing Loans," Business Systems Research, Society for Promotion of Business Information Technology (BIT), vol. 4(1), pages 87-98.
    2. Deni Memić & Selma Škaljić-Memić, 2013. "Performance Analysis and Benchmarking of Commercial Banks Operating in Bosnia and Herzegovina: a DEA Approach," Business Systems Research, Society for Promotion of Business Information Technology (BIT), vol. 4(2), pages 17-37.

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