Do Liquidity and Capital Structure Predict Firms’ Financial Sustainability? A Panel Data Analysis on Quoted Non-Financial Establishments in Ghana

Abstract

This study examined the connection between liquidity, capital structure, and the financial sustainability of 28 quoted non-financial establishments in Ghana. Panel data for the period from 2008 to 2019 was used for the analysis. In the study, liquidity was proxied by the current ratio, while the debt ratio was used as a surrogate of capital structure. Additionally, return on equity (ROE) was employed as a measure of sustainability. This indicator was used because of its flexibility as it can be applied to any line of business or product. From the results, the studied panel was cross-sectionally independent. Furthermore, the series were first differenced stationary and cointegrated in the long-run. The elasticities of the predictors were determined through the generalized method of moments (GMM) estimator, and from the results, liquidity proxied by the current ratio improved the entities’ financial sustainability. In addition, capital structure surrogated by the debt ratio promoted the financial sustainability of the establishments. Moreover, the interaction between capital structure and liquidity advanced the corporates’ financial sustainability. Size, growth, and operational efficiency were significantly positive determinants of the sustainability of firms, but asset tangibility had a trivial effect on the entities’ sustainability. On the causal relations among the variables, there was a bilateral connection amidst current ratio and return on equity; between cash flow ratio and return on equity; between debt ratio and return on equity; between size and return on equity; between operational efficiency and return on equity. Additionally, a single-headed causality moving from growth to return on equity was uncovered. Finally, there was no causal liaison amidst tangibility and return on equity. Based on the findings, it was recommended, amongst other suggestions, that an optimal liquidity level that is capable of supplying the firms with sufficient liquid resources should be maintained. Furthermore, the firms should use more internal funds to back their activities because that choice is safer than the alternatives. The corporates should also prefer that option because it has no associated costs that could adversely impact their sustainability.