Quarterly long-term relation between liquidity and profitability indicators: evidence from textile companies

Abstract

This paper analyzes the long-term relation between liquidity and profitability ratios for a group of Brazilian publicly traded textile companies, using quarterly data from March 1995 to March 2009. The underlying hypotheses of the study are that there is a significant and positive relation, in the medium- and the long-term, between liquidity and profitability indicators. In other words, low liquidity can worsen high profitability or vice-versa, and one can verify a general tendency toward the Granger causality among the indicators. The results suggest that there is a positive temporal relation and show that the companies reflect Granger causality in different directions (from profitability to liquidity and from liquidity to profitability). Thus, despite the long-term cross-relationship, it was impossible to establish a single relation regarding the direction of causality.