What is a real measure of corporate liquidity
The financial health hypothesis argues that the valuation multiple of book value of equity (earnings) increases (decreases) as financial health decreases. By considering the liquidity dimension of financial health, we analyze an accrual-based liquidity ratio (current ratio) and a cash-based liquidit...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
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Sciendo
2021-03-01
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| Series: | International Journal of Management and Economics |
| Subjects: | |
| Online Access: | https://doi.org/10.2478/ijme-2021-0002 |
| _version_ | 1797987763222478848 |
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| author | Ertugrul Melik Coskun Ali |
| author_facet | Ertugrul Melik Coskun Ali |
| author_sort | Ertugrul Melik |
| collection | DOAJ |
| description | The financial health hypothesis argues that the valuation multiple of book value of equity (earnings) increases (decreases) as financial health decreases. By considering the liquidity dimension of financial health, we analyze an accrual-based liquidity ratio (current ratio) and a cash-based liquidity ratio (OCF ratio) from the perspective of this hypothesis. Using the median values of these ratios, we divide the sample consisting of listed firms on Borsa Istanbul during 2009–2018 into two and document the ensuing outcomes. Valuation multiples of book value of equity and earnings are reported as being statistically indifferent between low-liquid and high-liquid subgroups obtained for the median current ratio. However, the valuation multiple of book value of equity (earnings) significantly increases (decreases) for the low-liquid subgroup below the median OCF ratio. As the latter is consistent with the financial health hypothesis, this study reveals that the OCF ratio is a more convenient and reliable measure of liquidity than the current ratio. |
| first_indexed | 2024-04-11T07:52:16Z |
| format | Article |
| id | doaj.art-051a0bb6a4bf47d88ab3f359ebc44904 |
| institution | Directory Open Access Journal |
| issn | 2543-5361 |
| language | English |
| last_indexed | 2024-04-11T07:52:16Z |
| publishDate | 2021-03-01 |
| publisher | Sciendo |
| record_format | Article |
| series | International Journal of Management and Economics |
| spelling | doaj.art-051a0bb6a4bf47d88ab3f359ebc449042022-12-22T04:36:01ZengSciendoInternational Journal of Management and Economics2543-53612021-03-0157131310.2478/ijme-2021-0002What is a real measure of corporate liquidityErtugrul Melik0Coskun Ali1Department of Business Administration, Galatasaray University, Istanbul, Turkey.Department of Management, Bogazici University, Istanbul, Turkey.The financial health hypothesis argues that the valuation multiple of book value of equity (earnings) increases (decreases) as financial health decreases. By considering the liquidity dimension of financial health, we analyze an accrual-based liquidity ratio (current ratio) and a cash-based liquidity ratio (OCF ratio) from the perspective of this hypothesis. Using the median values of these ratios, we divide the sample consisting of listed firms on Borsa Istanbul during 2009–2018 into two and document the ensuing outcomes. Valuation multiples of book value of equity and earnings are reported as being statistically indifferent between low-liquid and high-liquid subgroups obtained for the median current ratio. However, the valuation multiple of book value of equity (earnings) significantly increases (decreases) for the low-liquid subgroup below the median OCF ratio. As the latter is consistent with the financial health hypothesis, this study reveals that the OCF ratio is a more convenient and reliable measure of liquidity than the current ratio.https://doi.org/10.2478/ijme-2021-0002cash flow statementcurrent ratiofinancial healthliquidityoperating cash flowsg14m21m41 |
| spellingShingle | Ertugrul Melik Coskun Ali What is a real measure of corporate liquidity International Journal of Management and Economics cash flow statement current ratio financial health liquidity operating cash flows g14 m21 m41 |
| title | What is a real measure of corporate liquidity |
| title_full | What is a real measure of corporate liquidity |
| title_fullStr | What is a real measure of corporate liquidity |
| title_full_unstemmed | What is a real measure of corporate liquidity |
| title_short | What is a real measure of corporate liquidity |
| title_sort | what is a real measure of corporate liquidity |
| topic | cash flow statement current ratio financial health liquidity operating cash flows g14 m21 m41 |
| url | https://doi.org/10.2478/ijme-2021-0002 |
| work_keys_str_mv | AT ertugrulmelik whatisarealmeasureofcorporateliquidity AT coskunali whatisarealmeasureofcorporateliquidity |