Assessing the Relationship between Financial Slack and Financial Corporation Performance

Many current studies that evaluate liquidity of financial corporation theorize the impact that liquidity has on performance. Most studies relate current liquidity impact to current profitability trying to define what the most efficient volume of liquidity is to maximize performance while allowing an absorber against market shock and instability. The specific problem is there is a lack of consistency in previous study results as to the most effective method of measuring current liquidity as a predictor of future profitability. The purpose of this quantitative study was to assess whether or not there is any specific measure of current liquidity that has a stronger statistical relationship to any specific measure of future profitability. A comparative method was used to assess the potential relationship variation between different historical methods of measuring corporate liquidity and profitability. A statistical analysis of three corporations using four data points from 2006-2010 was used comparing corporate current liquidity measurements to future profitability measurements to assess the strength of the statistical relationship between current liquidity level and future profitability. The analysis is a quantitative correlation method with primary data gathered from both the independent and dependent variables. The primary statistical analysis identified if there is a statistical relationship by calculating correlation coefficient, r, for each liquidity measurement compared to each profitability measurement in this study. If a strong relationship exists, r is less than (-.8) or greater than (.8), between any liquidity measurement and any profitability measurement as defined by the correlation coefficient, further analysis was conducted by measuring coefficient of determination, r2, associated with the dependent variable of profitability. Identifying the variation of correlation may aid in assessing the difference in variation between different methods of measuring liquidity and profitability. Within the study only 1 of 16 comparisons had a strong correlation relationship.