http://martinia.com MARTINIA © 2014, World of Researches Publication ISSN: 0297-0902 Ac. J. Psy. Stud. Academic Journal of Psychological Studies www.worldofresearches.com Vol. 3, Issue 1, 80-86, 2014 VOL.5 NO.2 Page:73-80 Surveying the Effects of Modern Criteria of Liquidity on Financial Performance of Companies for Unprofitable Companies in Comparison with Profitable Companies Amir Ghorban Zadeh and Mohammad RezaAbdoli Department of Accounting, Shahrood branch, Islamic Azad University, Shahrood, Iran. Corresponding Author: Mohammad RezaAbdoli Abstract Separating management from ownership and consequently it, introducing agency theory, performance appraisal is considered as one of the most important issues in the field of accounting. The goal of this study is to survey the effect of modern criteria of liquidity on financial performance of companies in unprofitable companies in comparison with profitable companies. Linear regression method was used to test the hypotheses. Statistical population consists of 80 companies (40 unprofitable companies and 40 profitable companies) in a 5 – year period from 2008 to 2013. Regardless of firm size, the results indicate that there is a negative significant relationship between liquidity criterion and ROA in unprofitable companies in first hypothesis. There is not a significant relationship between liquidity criteria and Tobin Q ratio and in unprofitable companies in second hypothesis (except control variable of firm size). Regardless of firm size, there is a negative relationship between cash conversion cycle period and Tobin Q ratio in third hypothesis. There is not a significant relationship between cash conversion cycle period and Tobin Q ratio in unprofitable companies in fourth hypothesis and there is only negative effect. Regardless firm size, there is a negative significant relationship between liquidity criteria and ROA in profitable companies in fifth hypothesis. There is negative significant relationship between liquidity criteria and Tobin Q ratio regardless of firm size in sixth hypothesis. Regardless of firm size, there is a negative significant relationship between cash conversion cycle and ROA in profitable companies in seventh hypothesis. There is a negative significant relationship between cash conversion cycle and Tobin Q ratio in profitable companies regardless of firm size in eighth hypothesis. According to the results obtained from the hypotheses, generally, modern liquidity criteria provide more accurate and more significant effect on performance appraisal of profitable companies in comparison with modern liquidity criteria of performance appraisal in unprofitable companies for financial information users to make optimally decisions . Keywords: Modern Liquidity Criteria, Comprehensive Liquidity Criterion, Cash Conversion Cycle, Financial Performance, ROA, Tobin Q Ratio, Unprofitable Companies, Profitable Companies INTRODUCTION December, 2014 73 Ghorban Zadeh and Abdoli., 2014 There are different methods to evaluate profitability and liquidity in companies. One of them is financial ratios which were used from the early 20th century. Among these, the criteria which evaluate liquidity conditions of companies have been specially received attention by analysts in so previous years. So some analysts such as Melyk and Birita (1), Richard and Laughlin (2) and Shulman and Cox (3) analyzed the disadvantages of traditional criteria (instant and current ratios) to provide modern criteria. Since the situation of a business unit and its managers depend on various factors including financial statements, being true of these items has high value for shareholders. Identifying these items and ratios obtained from these items can be useful for shareholders and other financial statement users. Constantly, the difference of unprofitable companies with profitable companies has been received more attention in business environment that it can has impact on its survival and innovation of companies (4). Evaluation and performance of companies have been received constantly attention by shareholders, investors, financial creditors such as banks, financial institution, creditors and specially managers. Performance appraisal is determined with two indexes of liquidity power and profitability in terms of finance. Profitability refers to be healthy of business unit and liquidity power refers to survival signal of business unit (5). The indicators which evaluate liquidity condition of companies had been received attention many years age. This leads analysts analyze the disadvantages of traditional indicators for providing modern indicators. These indicators pay attention to the disadvantages resulting from traditional indicators of liquidity because of ignoring details of liquidity situation of companies. In another words, profitability of companies is considered almost by reported profit that it compasses important information when people decide based on it. Financial analysts are considered generally reported profit as a significant factor in their judgments. Also, investors rely on financial statements, specially reported profit, to decide their investments. It should be noted that the companies have good growth and investors pay attention more to them and according to representative theory; managers at top of the goals seek to find influential factors on company growth and try constantly to focus on these factors during their planning and gain owners' satisfactory. Financial performance is one of the proper tools for company growth in securities markets. Therefore, it should be noted that if there is a problem in conditions of company growth, it can be resulted from improper performance of management. Finally, it should be noted that since financial ratios are extracted from financial statements of company, because of this, financial ratios can be appropriate indicator to evaluate financial performance. In this study, we survey the relationship between modern indicators of liquidity on financial performance of unprofitable companies in comparison with profitable companies in Tehran Stock Exchange. Theoretical Principles and Research Background Dependent Variable Financial Performance of Companies Financial performance of companies is evaluated by the indicators represent financial performance. Used indicators for evaluating financial performance consist of: 1. Return on Asset (ROA): net income divided by sum of total assets of company. 2. Tobin Q Ratio: market value divided by book value of company assets. December, 2014 74 Surveying the Effects of Modern Criteria of Liquidity on Financial Performance … Independent Variable 1. ACR: with calculating weighted average of current ratio, this indicator meet the problem related to ignoring liquidity level of current assets and time of repay of current liabilities. 2. CCC indicator (Cash Conversion Cycle): Citman defined cash conversion cycle as a critical component in working capital management. Cash conversion cycle refers to net period between payment of liabilities and cash receive by debt collection. Whatever this period be shorter, company has better liquidity. Research Background Ghazali (6) studied the relationship between ownership structure, corporate governance and company performance in Malaysian companies. The results indicated that there is a significant relationship between ownership structure and company value, while there is not a significant relationship between corporate governance and company performance. Nobanee and Hajjar (7) in a study entitled "working capital management, operating cash flow and company performance" studied the relationship between working capital management, company performance and cash activation among 5802 companies from 1990 to 2004. The results indicated that managers can increase profitability and cash flow through shortening cash conversion cycle and collection period of receivable accounts and they can decrease profitability and cash flow via prolonging due date of payable accounts. Lazaridis and Tryfonidis (8) studied the relationship between working capital management and profitability in 131 companies listed on Athens Stock Exchange from 2001 to 2004. They found that there is a significant relationship between profitability (Return on Assets) and cash conversion cycle and managers can play critical role through managing optimally components of cash conversion cycle including receivable accounts, inventory and payable accounts to create profit for companies. Afshar and Zamani A'moghin (9) studied the relationship between performance appraisal and performance ranking with company growth. TOPSIS method was used to rank companies in terms of performance appraisal indicators. The sample consists of 100 companies listed on Tehran Stock Exchange from 2006 to 2011. The results indicated that there is a significant relationship between performance appraisal indicators and their growth and meanwhile there is a significant positive relationship between total rank of company from performance appraisal indicators and company growth. METHODOLOGY From standpoint of goal, this research is an applied research and it is correlation – descriptive research in terms of method. The goal of this research is to determine existence, level and type of relationship between the variable using posts – event approach (via past information). T- Statistics was used to survey the significance level of coefficient of independent variables in any model. Obtained t-statistics is compared with t-statistics in the table. If calculated absolute tstatistics is bigger than t-statistics in the table, the coefficient will be significant and indicates that there is a relationship between dependent and independent variables. Possibility amount or significant level was conducted to make decision about support of rejection of a hypothesis as an alternative method. If calculated amount is bigger or equal Ghorban Zadeh and Abdoli., 2014 with type I error rate (α), null hypothesis will be supported and if it is smaller than type I error rate (α), null hypothesis will be rejected. RESULTS Since the goal of the study is to determine the relationship between each of modern indicators of liquidity (comprehensive indicator of liquidity and cash conversion cycle) and two indicators of financial performance (ROA and Tobin Q ratio), then each of items is compared separately with each other in unprofitable and profitable companies to survey the relationship between the indicators. So hypotheses 1, 3, 5 and 7 and hypotheses 2, 4, 6 and 8 are compared collectively. First, Third, Fifth and Seventh Hypotheses First hypothesis: there is a significant relationship between comprehensive indicator of liquidity and return on assets in unprofitable companies. Third hypothesis: there is a significant relationship between cash conversion cycle indicator and return on assets in unprofitable companies. Fifth hypothesis: there is a significant relationship between comprehensive indicator of liquidity and return on assets in profitable companies. Seventh hypothesis: there is a significant relationship between cash conversion cycle and return on assets in profitable companies. H0: r=0 H1: r≠ 0 Results of Regression Model As can be seen in table 1, the results of fitted regression models have been provided. Considering the results of determination coefficient of regression models indicate that theses coefficient in unprofitable and profitable companies are 64% and 82%, respectively. It means than the variables of modern indicators of liquidity (comprehensive indicator of liquidity and cash conversion cycle) could determine 6.4 and 8.2 per cent of the changes of return on assets in unprofitable and profitable companies, respectively. On the other hand, variance analysis test was used to show that regression model used is significant or not. F-statistics was used to test this statistics. F amount show that used regression model is a proper model or not. In another words, if independent variables can explain well the changes of dependent variables or not. According to the results of variance analysis, because significance level of F-statistics is smaller than 5% in both models, then it can be said H0 is rejected and H1 is supported with 95% confidence level. It means that there is a significant relationship between modern indicators of liquidity (comprehensive indicator of liquidity and cash conversion cycle) and return on assets both unprofitable companies and profitable companies. Hence it can be said that fitted regression model is an appropriate model. Testing hypotheses 1 and 3 related to unprofitable companies, the regression coefficients of comprehensive indicator of liquidity variable (-0.003) and cash conversion cycle (0.0001) variable indicated that there is a negative (reverse) significant relationship between above two variables and return on assets in unprofitable companies. Then first and third hypotheses are supported at 95% confidence level (rejected H0). Also, the December, 2014 76 Surveying the Effects of Modern Criteria of Liquidity on Financial Performance … results of fifth and seventh hypotheses related to return on assets in profitable companies indicted that there is a negative significant relationship between regression coefficients of comprehensive indicator of liquidity and cash conversion cycle (- 0.0001). Hence, because significance level of the coefficients of the variable is smaller than 5%, then fifth and seventh hypotheses were supported at 5% significance level (rejected H0). According to the results of fitted models, it can be said that there is a negative relationship between modern indicators of liquidity (comprehensive indicator of liquidity and cash conversion cycle) and return on assets in profitable and unprofitable companies. It means that if comprehensive indicator of liquidity and cash conversion cycle increase one unit, return on assets will decrease -0.003 and – 0.0001 units in unprofitable companies and -0.001 and -0.0001 units in profitable companies. Table 1: testing of first, third, fifth and seventh hypotheses Independent Unprofitable companies Profitable companies variable B* Beta tSignifican B Beta tSignifican * statisti ce level statisti ce level cs cs %62 5.499 0.000 0.143 15.377 0.000 Intercept -2.076 %39 -2.726 0.007 comprehensi 0.001 0.19 ve indicator 0.003 0.15 1 4 of liquidity -2.688 0.008 -3.029 0.003 Cash 0.000 0.21 conversion 0.000 0.19 1 5 1 6 cycle %64 %82 Determinati on coefficient %53 %72 Adjusted determinatio n coefficient 6.04(0.003) 8.062(0.000) F-statistics 1.5 1.5 DurbinWatson B* & Beta are slop of line (non – standard regression coefficient) and standard regression coefficient Number in bracket show significance level Second, Fourth, Sixth and Eighth Hypotheses Second Hypothesis: there is significant relationship between comprehensive indicator of liquidity and Tobin Q ratio in unprofitable companies. Fourth Hypothesis: there is a significant relationship between cash conversion cycle and Tobin Q ratio in unprofitable companies. Sixth Hypothesis: there is a significant relationship between comprehensive indicator of liquidity and Tobin Q ratio in profitable companies. Eighth Hypothesis: there is a significant relationship between cash conversion cycle and Tobin Q ratio in profitable companies. Ghorban Zadeh and Abdoli., 2014 H0: r=0 H1: r≠ 0 Table 2 provides the results of second, fourth, sixth and eighth hypotheses. The determination coefficients of fitted regression model are % 17 and % 49 for unprofitable companies and profitable companies, respectively. It means that liquidity indicators determine 1.7 and 4.9 per cent of all changes of Tobin Q ratio in unprofitable and profitable companies, respectively. Considering the significance of regression models indicate that F-statistics for profitable companies is smaller than 5% and significant at 95% confidence level. It means that there is a significant relationship between liquidity indicators and Tobin Q ratio at 5% error level. Therefore, it can be said that H0 is rejected and H1 is supported. On the other hand, F-statistics in unprofitable companies is bigger than 5%, it can be noted that there is not a significant relationship between modern indicators of liquidity and Tobin Q ratio in unprofitable companies. Hence, H0 is supported and H1 is rejected. Table 2: testing of second, fourth, sixth and eighth hypotheses Independent Unprofitable companies Profitable companies variable B* Beta tSignifican B Beta tSignifican * statisti ce level statisti ce level cs cs 1.106 48.967 0.000 1.53 24.104 0.000 Intercept -0.442 0.659 -2.438 %16 comprehensi 0.008 0.17 ve indicator 0.001 0.03 3 6 of liquidity -1.584 0.115 -2.011 %46 Cash 0.000 0.14 conversion 0.000 0.12 1 0 1 5 cycle %17 %49 Determinati on coefficient 0.007 %38 Adjusted determinatio n coefficient 1.627(0.199) 4.667(%11) F-statistics 1.5 1.5 DurbinWatson B* and Beta are slop of line (non – standard regression coefficient) and standard regression coefficient Number in bracket show significance level Considering regression coefficients indicate that there is a negative significant relationship between modern indicators on liquidity and Tobin Q ratio in profitable companies at 5% error level. Hence, sixth and eighth hypotheses are supported with higher 95% confidence level (rejected H0). But, since the significance level of December, 2014 78 Surveying the Effects of Modern Criteria of Liquidity on Financial Performance … coefficients of liquidity indicators in unprofitable companies is bigger than 5%, then there is not a significant relationship between liquidity indicators and Tobin Q ratio. Then second and fourth hypotheses are rejected (supported H0). Considering the regression coefficients of the variables in fitted models indicate comprehensive indicator of liquidity (- 0.008) and cash conversion cycle (- 0.0001) have negative and significant effect on Tobin Q ratio in profitable companies. Considering coefficients in unprofitable indicate that comprehensive indicator of liquidity (- 0.001) and cash conversion cycle (-0.0001) have negative effect on Tobin Q ratio, but this amount is not significant. DISCUSSION The performance appraisal of companies has high importance in financial decisions. There are different methods and indicators to evaluate company performance. But selecting an appropriate indicator is a topic that has been received more attention in financial literatures. The main goal of this research is to survey relationship between each of modern indicators of liquidity (comprehensive indicator of liquidity and cash conversion cycle) with two selected indicators of financial performance (return on assets and Tobin Q ratio). Of course, each of items is studied and compared separately in unprofitable and profitable companies to study relationship among these indicators. With shaping issue of ownership separation from management and the existence of massive conflict of interest between owners and managers, performance appraisal of companies and their leaders and managers received more attention behalf creditors, owners, government and even managers (10, 11). In this research, we are trying to survey the effect on modern indicators of liquidity on financial performance companies for unprofitable companies in comparison with profitable companies in companies listed on Tehran Stock Exchange. In fact, we are actually looking for this topic that if the quality of any modern indicators of liquidity has effect on financial performance of companies (for unprofitable companies in comparison with profitable companies) or not? The results of the research indicate that there is a negative significant relationship between modern indicators of liquidity or the independent variables (comprehensive indicator of liquidity and cash conversion cycle) and return of assets (one of two dependent variables) both unprofitable companies and profitable companies. According to statistical results, it can be said that this relationship level in profitable companies is a little stronger and higher than unprofitable companies. There is a negative significant relationship between modern indicators of liquidity and Tobin Q ratio in profitable companies. But, about the relationship between modern indicators of liquidity and Tobin Q ratio in unprofitable companies, it can be said that H0 is supported and H1 is rejected at significance level higher than 5%. It means that there is not a relationship between two variables. Generally, about difference or similarity of the results among unprofitable and profitable companies based on analyses and statistical results on dependent variables (Tobin Q ratio and return on assets) and independent variables (comprehensive indicator of liquidity and return on assets) both unprofitable and profitable companies, it should be noted that profitable companies use better efficiently assets than unprofitable companies. It represents better management and usage more efficient of managers of these companies from properties and assets. Obtained figures from Tobin Q indicate profitable companies have higher value in stock exchange in comparison with unprofitable companies in resulting from better performance and stability in profitability. Ghorban Zadeh and Abdoli., 2014 comprehensive indicator of liquidity figure indicate that profitable companies have better liquidity in compared unprofitable via more adjusted current assets and or lesser adjusted current liabilities. Applying conservative strategies by managers, working capital in profitable companies can reduce liquidity risk and company yield and finally, cash conversion cycle indicator represents better working capital management of profitable companies in comparison with unprofitable companies, because net period between liability repayment and collection of them in profitable companies is shorter than unprofitable companies. 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