Does Corporate Governance Moderate the Relationship between Liquidity Ratios and Financial Performance? Evidence from Indian Pharmaceutical Companies

Najib H.S. Farhan, Eissa Alhomidi, Faozi A. Almaqtari and Mosab I. Tabash

Academic Journal of Interdisciplinary Studies, 2019, vol. 8

Abstract: The current study is going to examine the impact of liquidity ratios on the financial performance of Indian pharmaceutical companies. Furthermore, it attempts to find out whether corporate governance moderates the relationship between liquidity and firms’ performance. The analysis of this paper is based on a panel data approach of 82 pharmaceutical companies, for the period from 2008 to 2017. GMM model is used for estimating the results. Two accounting-based measures and one marketing based measure are used as proxies for firms' financial performance. Current ratio and quick ratio are used as proxies for independent variables. Leverage and firms' size are used as control variables. The study found that the current ratio and quick ratio significantly and positively impact pharmaceutical companies’ financial performance measured by return on assets and Tobin Q. Moreover, it was found that corporate governance moderates the relationship between current ratio, quick ratio, and net operating margin. It seems that the impact of liquidity ratios on firms’ performance has been over-studied and the literature is overwhelming. However, this study adds a new contribution to the existing literature by introducing a corporate governance as a moderation factor.

Date: 2019
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