A study on the relationship of earnings and cash flow with corporate liquidity in the trading/service sector in Malaysia / Tengku Fairuz Tengku Embong

The relative usefulness of earnings versus cash flow in providing information to decision makers has been examined in many contexts. However, research is lacking which empirically tests the relative information provided by these two measures in the context of explaining corporate liquidity. Realizing this fact, a number of previous studies have been conducted to test the relationship between measures of earnings, cash flow and liquidity. The purpose of this study is to extend the analysis further to analyse the relationship of earnings and cash flow with corporate liquidity by considering the industry effects which focuses on the quoted companies in the trading/service sector. The sample of this study are taken from 40 public companies, listed on the trading/service on the Kuala Lumpur Stock Exchange (KLSE) Main Board. The Correlation and Regression analysis are used to analyse the accounting data obtained from annual reports of the respective firms between 1992-1996 The results of this study indicates that there is no significant relationship exists between earnings and cash flow with corporate liquidity. The overall implication of the result is that both earnings and cash flow cannot be used to provide information in the trading/service sector in Malaysia. The relationship of the earnings and cash flow may be vary if the other sectors are selected as the sample. The significance of the relationship may be period specific and may vary for the static and dynamic measures of liquidity (cash conversion cycle). This is due to the fact that this study done on a sample in the only consisted of top big companies in the trading/service sector listed on the Kuala Lumpur Stock Exchange (KLSE) Main Board. Thus, it is not possible to generalise the findings beyond these areas. However, the findings in this study can be used as a general guide to determine the relationship of earnings and cash flow with corporate liquidity