<abstract xml:lang="en" xmlns="http://www.w3.org/1999/xhtml"><p><bold>Background:</bold> Previous studies have shown that in some countries, liquid assets increased leverage while in other countries liquid firms were more frequently financed by their own capital and therefore were less leveraged. <bold>Objectives:</bold> The aim of this paper is to investigate the impact of liquidity on the capital structure of Croatian firms. <bold>Methods/Approach:</bold> Pearson correlation coefficient is applied to the test on the relationship between liquidity ratios and debt ratios, the share of retained earnings to capital and liquidity ratios and the relationship between the structure of current assets and leverage. <bold>Results:</bold> A survey has been conducted on a sample of 1058 Croatian firms. There are statistically significant correlations between liquidity ratios and leverage ratios. Also, there are statistically significant correlations between leverage ratios and the structure of current assets. The relationship between liquidity ratios and the short-term leverage is stronger than between liquidity ratios and the long-term leverage. <bold>Conclusions:</bold> The more liquid assets firms have, the less they are leveraged. Long-term leveraged firms are more liquid. Increasing inventory levels leads to an increase in leverage. Furthermore, increasing the cash in current assets leads to a reduction in the short-term and the long-term leverage.</p></abstract>

Background: Previous studies have shown that in some countries, liquid assets increased leverage while in other countries liquid firms were more frequently financed by their own capital and therefore were less leveraged. Objectives: The aim of this paper is to investigate the impact of liquidity on the capital structure of Croatian firms. Methods/Approach: Pearson correlation coefficient is applied to the test on the relationship between liquidity ratios and debt ratios, the share of retained earnings to capital and liquidity ratios and the relationship between the structure of current assets and leverage. Results: A survey has been conducted on a sample of 1058 Croatian firms. There are statistically significant correlations between liquidity ratios and leverage ratios. Also, there are statistically significant correlations between leverage ratios and the structure of current assets. The relationship between liquidity ratios and the short-term leverage is stronger than between liquidity ratios and the long-term leverage. Conclusions: The more liquid assets firms have, the less they are leveraged. Long-term leveraged firms are more liquid. Increasing inventory levels leads to an increase in leverage. Furthermore, increasing the cash in current assets leads to a reduction in the short-term and the long-term leverage.

The impact of liquidity on the capital structure: a case study of Croatian firms

Faculty of Economics, J.J. Strossmayer University of Osijek, Osijek, Croatia

Institute for Scientific and Art Research Work, Croatian Academy of Science and Art, Osijek, Croatia

Business Systems Research Journal

{"article-title":"The impact of liquidity on the capital structure: a case study of Croatian firms"}

Background: Previous studies have shown that in some countries, liquid assets increased leverage while in other countries liquid firms were more frequently...

The impact of liquidity on the capital structure: a case study of Croatian firms

Published Online: Sep 17, 2012

Page range: 30 - 36

DOI: https://doi.org/10.2478/v10305-012-0005-1

Keywords
liquidity, capital structure, leverage

This content is open access.

The impact of liquidity on the capital structure: a case study of Croatian firms

Published Online: Sep 17, 2012

Page range: 30 - 36

DOI: https://doi.org/10.2478/v10305-012-0005-1

Keywordsliquidity, capital structure, leverage

This content is open access.

Keywords
liquidity, capital structure, leverage