The Effect of Working Capital and Cash Holding Level on Firm Performance: Evidence from the Covid-19 Pandemic

Abstract

Short-term financing decisions on liquidity management have significant implication on firm’s financial profitability. The importance of having proper liquidity is proven to be even more prevalent in the times of the Covid-19 pandemic. The purpose of this paper is to examine how liquidity can influence the financial performance of a company before and after the pandemic. This study used 29 listed Bangladeshi banks and financial institutions. 5 years from 2016 to 2020 are taken as samples. Correlation matrix, multivariate OLS regression analysis, panel data random-effect regression statistical measures are used to evaluate the data. Additionally, the interaction effect of explanatory variables and lagged variables of dependent variables has been used to increase the reliability of the findings. Our results portray that both current ratio and cash holding level have positive relationship with firms’ profitability. However, as dictated by trade-off theory, there is an inverted U-shaped relationship as the values of current ratio and cash holding levels increase. Another major finding of the study is the negative impact of the covid-19 pandemic on both ROA and ROE. Among the control variables, growth of operating profit shows positive relationship and the other variables – firm size, debt to equity ratio and loan to deposit ratio show negative relationships.