Determinants and speed of adjustment of financial liquidity: Evidence from Central and Eastern Europe

Leszek Czerwonka; Jacek Jaworski

Authors

Leszek Czerwonka ✉️ Faculty of Economics, University of Gdańsk
leszek.czerwonka@ug.edu.pl https://orcid.org/0000-0002-8438-6443
Jacek Jaworski WSB Merito University in Gdańsk https://orcid.org/0000-0002-6629-3497

Keywords:

working capital management (WCM), liquidity determinants, target level of liquidity, speed of liquidity adjustment, Central and Eastern Europe

Abstract

The article aims at (i) identifying the financial liquidity determinants at firm, industry and country level, (ii) examining whether firms follow the target liquidity level, and (iii) determining the average speed of adjustment to this level. Statistical analysis was used in an empirical study based on financial data of 13,513 firms operating in seven countries from Central and Eastern Europe in the research period 2012-2020. The study confirmed company-specific liquidity determinants (company size, growth, tangibility, leverage and cash flow). The average industry liquidity was found to be an industry-specific factor (positive relationship). The positive impact of unemployment and access to credit was detected at country level. The study also showed that country-specific determinants had twice as broad an influence on liquidity as industry-specific factors. It also provided evidence that companies tend to achieve the target liquidity level. The speed of adjustment was 88%.

References

Abuzayed, B. (2012). Working capital management and firms’ performance in emerging markets: The case of Jordan. International Journal of Managerial Finance, 8(2), 155-179. https://doi.org/10.1108/17439131211216620

Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2010). Working capital management in SMEs. Accounting and Finance, 50(3), 511-527. https://doi.org/10.1111/j.1467-629X.2009.00331.x

Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2012). How does working capital management affect the profitability of Spanish SMEs? Small Business Economics, 39(2), 517-529. https://doi.org/10.1007/s11187-011-9317-8

Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2013). The speed of adjustment in working capital requirement. European Journal of Finance, 19(10), 978-992. https://doi.org/10.1080/1351847X.2012.691889

Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2021). The speed of adjustment in net operating working capital: an international study. Spanish Journal of Finance and Accounting / Revista Española de Financiación y Contabilidad, 50(4), 423-440. https://doi.org/10.1080/02102412.2020.1864176

Baser, F., Gokten, S., Kucukkocaoglu, G., & Ture, H. (2017). Liquidity-profitability tradeoff existence in Turkey: An empirical investigation under structural equation modeling. Copernican Journal of Finance & Accounting, 5(2), 27-44. https://doi.org/10.12775/cjfa.2016.013

Boudon, R. (2003). Beyond rational choice theory. Annual Review of Sociology, 29(1), 1-21. https://doi.org/10.1146/annurev.soc.29.010202.100213

Cetenak, E. H., Vural, G., & Sokmen, G. (2017). Determinants of working capital in emerging markets: do economic developments matter? In Ü. Hacioğlu, H. Dinçer, & N. Alayoğlu (Eds.), Global Business Strategies in Crisis. Strategic Thinking and Development (pp. 385-397). Springer Nature. http://link.springer.com/10.1007/978-3-319-44591-5

Chukwunweike, V. (2014). The impact of liquidity on profitability of some selected companies: the financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), 81-90. www.iiste.org/Journals/index.php/RJFA/article/view/11414/11746

Cuong, N. T. (2016). The determinants of working capital requirement and speed of adjustment : evidence from Vietnam’s seafood processing enterprises. International Research Journal of Finance and Economics, 147, 88-98.

Czerwonka, L., & Jaworski, J. (2023). Determinants of working capital management in small and medium enterprises: evidence from Central and Eastern Europe. Journal of International Studies, 16(2), 162-180. https://doi.org/10.14254/20718330.2023/16-2/11

Dang, C., Li, Z., & Yang, C. (2018). Measuring firm size in empirical corporate finance. Journal of Banking & Finance, 86, 159-176.

Dang, H. T. (2020). Determinants of liquidity of listed enterprises: evidence from Vietnam. Journal of Asian Finance, Economics and Business, 7(11), 67-73. https://doi.org/10.13106/jafeb.2020.vol7.no11.067

Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance and Accounting. 30(3-4), 573-588. https://doi.org/10.1111/1468-5957.00008

Denis, D. J. (2011). Financial flexibility and corporate liquidity. Journal of Corporate Finance, 17(3), 667-674. https://doi.org/10.1016/j.jcorpfin.2011.03.006

Ding, S., Guariglia, A., & Knight, J. (2013). Investment and financing constraints in China: Does working capital management make a difference? Journal of Banking and Finance, 37(5), 1490-1507. https://doi.org/10.1016/j.jbankfin.2012.03.025

Drever, M., & Hutchinson, P. (2007). Industry differences in the determinants of the liquidity of Australian small and medium sized enterprises. Small Enterprise Research, 15(1), 60-76. https://doi.org/10.1080/13215906.2007.11005832

Eljelly, A. M. A. (2004). Liquidity-profitability tradeoff: an empirical investigation in an emerging market. International Journal of Commerce and Management, 14(2), 48-61. https://doi.org/10.1108/10569210480000179

Filbeck, G., & Krueger, T. M. (2005). An analysis of working capital management results across industries. Mid-American Journal of Business, 20(2), 11-18.

Gentry, J. (1976). Management perceptions of the working capital process, Faculty Working Papers, No. 352. College of Commerce and Business Administration, University of Illinois at Urbana-Champaign.

Greene, W. H. (2003). Econometric Analysis. Prentice Hall, Upper Saddle River.

Gujarati, D. N., & Porter, D. C. (2009). Basic Econometrics (5th ed.). McGraw-Hill/Irwin.

Huberman, G. (1984). External financing and liquidity. The Journal of Finance, 39(3), 895-908. https://doi.org/10.1111/j.15406261.1984.tb03684.x

Jaworski, J., & Czerwonka, L. (2018). Relationship between profitability and liquidity of enterprises listed on Warsaw Stock Economic and Social Perspective” – Lisbon, 15-16 November 2018, Book of Proceedings, 326-334. https://www.esdconference.com/upload/book_of_proceedings/Book_of_Proceedings_esdLisbon2018_Online.pdf Exchange. 35th International Scientific Conference on Economic and Social Development – “Sustainability from an

Jaworski, J., & Czerwonka, L. (2022). Profitability and working capital management: Evidence from the Warsaw Stock Exchange. Journal of Business Economics and Management, 23(1), 180-198. https://doi.org/10.3846/jbem.2022.15087

Kieschnick, R., Moussawi, R., & LaPlante, M. (2006). Corporate working capital management: determinants and consequences. International Journal of Managerial Finance, 3(2), 164-177.

Kim, C.-S., Mauer, D. C., & Sherman, A. E. (1998). The determinants of corporate liquidity: Theory and evidence. The Journal of Financial and Quantitative Analysis, 33(3), 335-359. https://doi.org/10.2307/2331099

Koralun-Bereźnicka, J. (2014). On the relative importance of corporate working capital determinants: findings from the EU countries. Contemporary Economics, 8(4), 415-434. https://doi.org/10.5709/ce.1897-9254.154

Koralun-Bereźnicka, J. (2018). Determinants of capital structure across European countries. In K. Jajuga, H. Locarek-Junge, & L. T. Orlowski (Eds.), Contemporary Trends and Challenges in Finance (pp. 199-209). Springer International Publishing AG Switzerland. https://doi.org/10.1007/978-3-319-76228-9

Labra, R., & Torrecillas, C. (2018). Estimating dynamic panel data. A practical approach to perform long panels. Revista Colombiana de Estadística, 41(1), 31-52. http://www.scielo.org.co/pdf/rce/v41n1/0120-1751-rce-41-01-00031.pdf

Lin, T.-T. T. (2015). Working capital requirement and the unemployment volatility puzzle. Journal of Macroeconomics, 46(December), 201-217. https://doi.org/10.1016/j.jmacro.2015.05.006

Lu, X., & White, H. (2014). Robustness checks and robustness tests in applied economics. Journal of Econometrics, 178, 194-206.

Lynch, S. M. (2013). Comparing means across multiple groups: Analysis of variance (ANOVA). In Using Statistics in Social Management Science, 34(9), 1054-1066. https://doi.org/10.1287/mnsc.34.9.1054

Martin, J. D., & Morgan, G. E. (1988). Financial planning where the firm’s demand for funds is nonstationary and stochastic. Research: A Concise Approach. Springer.

Mathuva, D. M. (2014). An empirical analysis of the determinants of the cash conversion cycle in Kenyan listed non-financial firms. Journal of Accounting in Emerging Economies, 4(2), 175-196. https://doi.org/10.1108/JAEE-10-2011-0045

Mitra, S., & Nandi, K. C. (2013). Linkage between liquidity, risk and profitability: A study with reference to Eastern Coalfields Ltd. Journal of Institute of Public Enterprise, 36(3/4), 29-48.

Moussa, A. A. (2019). Determinants of working capital behavior: Evidence from Egypt. International Journal of Managerial Finance, 15(1), 39-61. https://doi.org/10.1108/IJMF-09-2017-0219

Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187-221. https://doi.org/10.1016/0304-405X(84)90023-0

Nastiti, P. K. Y., Atahau, A. D. R., & Supramono, S. (2019). The determinant of working capital management: The contextual role of enterprise size and age. Business, Management and Education, 17(2), 94-110. https://doi.org/10.3846/bme.2019.10409

Nazir, M. S., & Afza, T. (2009). Working capital requirements and the determining factors in Pakistan. The Icfai Journal of Applied Finance, 15(4), 28-38. https://lahore.comsats.edu.pk/Papers/Abstracts/146-8588087907446883308.pdf

Niskanen, J., & Niskanen, M. (2006). The determinants of corporate trade credit policies in a bank-dominated financial environment: The case of Finnish small firms. European Financial Management, 12(1), 81-102. https://doi.org/10.1111/j.1354-7798.2006.00311.x

Opler, T., Pinkowitz, L., Stulz, R., & Wiliamson, R. (1999). The determinants and implications of corporate cash holdings. Journal of Financial Economics, 52(1), 3-46. https://doi.org/10.1016/S0304-405X(99)00003-3

Oseifuah, E. (2016). Determinants of working capital requirements: Evidence from selected non-financial firms listed on the Johannesburg Securities Exchange. The Journal of Accounting and Management, 6(1), 19-29.

Park, C., & Gladson, J. W. (1963). Working Capital. Collier Macmillan Ltd.

Petersen, M. A. (1997). Trade credit: theories and evidence. The Review of Financial Studies, 10(3), 661-691.

Prasad, P., Narayanasamy, S., Paul, S., Chattopadhyay, S., & Saravanan, P. (2019). Review of literature on working capital management and future research agenda. Journal of Economic Surveys, 33(3), 827-861. https://doi.org/10.1111/joes.12299

Priya, K., & Nimalathasan, B. (2013). Liquidity management and profitability: A case study of listed manufacturing companies in Sri Lanka. International Journal of Technological Exploration and Learning, 2(4), 161-165.

Raheman, A, Afza, T., Qayyum, A., & Bodla, M. (2010). Working capital management and corporate performance of manufacturing sector in Pakistan. International Research Journal of Finance and Economics, 47, 151-163.

Raheman, A. & Nasr, M. (2007). Working capital management and profitability – case of Pakistani firms. International Review of Business Research Papers, 3, 279-300.

Raykov, E. (2017). The liquidity-profitability trade-off in Bulgaria in terms of the changed financial management during crisis. Management, 22(1), 135-156.

Reddy, B. M. (2015). Tradeoff between liquidity and profitability: A study on TATA Steel Ltd. International Journal of Commerce, Business and Management, 4(2), 1096-1100.

Rehman, M. Z., Khan, M. N., & Khokhar, I. (2015). Investigating liquidity-profitability relationship: Evidence from companies listed in Saudi Stock Exchange (Tadawul). Journal of Applied Finance & Banking, 5(3), 159-173.

Richards, V. D., & Laughlin, E. J. (1980). A cash conversion cycle approach to liquidity analysis. Financial Management, 9(1), 32-38.

Sabki, S., Wong, W. C., & Regupathi, A. (2019). SME liquidity and its determinants. International Journal of Business and Society, 20(1), 111-124.

Sardo, F., & Serrasqueiro, Z. (2021). Determinants of working capital: Empirical evidence on manufacturing SMEs. Journal of Economic Studies, 49(3), 506-521. https://doi.org/10.1108/JES-10-2020-0513

Sarwar, A. (2020). The determinants of working capital management in Pakistan: The case of manufacturing sector. Competitive Social Science Research Journal, 1(2), 31-53.

Singh, H. P., & Kumar, S. (2014). Working capital management: A literature review and research agenda. Qualitative Research in Financial Markets, 6(2), 173-197. https://doi.org/10.1108/QRFM-04-2013-0010

Smith, K. (1980). Profitability versus liquidity tradeoffs in working capital management. In K. Smith (Ed.), Readings on the management of working capital (pp. 549-562). West Publishing Company.

Suchman, M. C. (1995). Managing legitimacy: strategic and institutional approaches. The Academy of Management Review, 20(3), 571-610. https://doi.org/10.2307/258788

Vintilă, G., & Nenu, E. A. (2016). Liquidity and profitability analysis of the Romanian listed companies. Journal of Eastern Europe Research in Business and Economics, 1-8. https://doi.org/10.5171/2016.161707

Vu, T. M. T., Truong, T. Van, & Dinh, D. T. (2020). Determinants of liquidity in manufacturing firms. Journal of Asian Finance, Economics and Business, 7(12), 11-19. https://doi.org/10.13106/JAFEB.2020.VOL7.NO12.011

Wasiuzzaman, S. (2018). Determinants of liquidity in Malaysian SMEs: a quantile regression approach. International Journal of Productivity and Performance Management, 67(9), 1566-1584. https://doi.org/10.1108/IJPPM-12-2017-0354

Youssef, I. S., Al Alam, A. F., & Salloum, C. (2022). Determinants of firm liquidity in Central and Eastern Europe SMEs. International Journal of Globalisation and Small Business, 13(2), 127-146. https://doi.org/10.1504/IJGSB.2022.127220