Abstract:
Purpose: Liquidity management encompasses both investment and financing
policies, with maintaining an optimal balance being crucial for profitability. This
study examines whether high liquidity turnover companies in Sri Lanka adopt
conservative or aggressive strategies to financing and investing in current assets, and
how these strategies effect profitability.
Design/methodology/approach: The study analyzes data from 56 companies across
the materials, capital goods, and retail sectors over a 10-year period (2013–2022),
using panel regression analysis in E-Views.
Findings: The fixed effect model reveals that companies with high liquidity adopting
a
conservative financing policy experience a significant negative effect on
profitability, likely due to increased opportunity costs and growth restrictions.
Meanwhile, investment policy shows an equal distribution between fixed and current
assets but has no significant effect on profitability, suggesting that matching assets
does not drive profit growth. However, sales levels show a significant and positive
effect on profitability, indicating that higher revenue generation directly boosts
profits.
Practical implications: Companies typically achieve profitability through increased
sales, yet conservative financing policies may restrict these gains. This study suggests
that a less conservative financing approach may enhance profitability.
Originality value: This study offers localized insights into the profitability impacts
of liquidity management in Sri Lanka’s high liquidity sectors. It highlights the value
of balancing short-term financing with current assets through effective forecasting to
optimize risk and return in similar emerging economies.
