Liquidity Profitability Trade-Offs And Dividend Policy: A Panel Data Analysis Of Non-Financial Firms

Abstract

This paper aims to draw attention to a unique application of balance sheet management as a deliberate comparison, the new content included, and its application in managing dividend policy, given a certain protection margin. People tend to believe that the practice of making dividend payments only through some mathematical calculation is still rather simple, as it is impossible to support the level of profitability or meet the needs of stockholders by attacking liquidity. Unfortunately, despite the copious number of research presented on these themes, much of the research initiatives to examine the behavior of dividend decision making have fallen short proper examination of the relationship between liquidity and profitability. This thesis focuses on the interpersonal factors of liquidity, and why it affects the policy of paying dividends in particular men, rather than non-bank financial companies. Data were drawn from the food and personal care sector for the period of 15 years, which a general 225 observations’ analysis will be done with Fixed Effects estimation in combination with Driscoll-Kraay robust standard errors to deal with firm-specific heterogeneity, heteroskedasticity, as well as cross-section dependence. The core finding in this work is that liquidity has a positive impact on dividend decisions, thus presenting corporations with the capacity to pay shareholders. The result shows that working capital is being managed in a very poor state within the firm, and higher borrowing levels suppress the propensity to pay dividends because the internally generated funds available are too high to pay for the dividends. This paper adds to the corporate finance literature by discussing the interaction between liquidity and profitability in one setting. Nevertheless, the study on other sectors and different measures is incomplete. Suggestions for future work include the examination of moderating and mediating factors such as corporate governance, financial options, or firms’ life stages, and the inclusion of other theoretically derived predictors of dividends, such as the use of dynamic.