INTERDEPENDENCE OF PROFITABILITY AND LIQUIDITY USING THE PANEL VAR MODEL

The aim of the research is to empirically verify the interdependence of company profitability and liquidity. The sample includes twenty non-financial corporations listed in at least one of the Zagreb Stock Exchange sector indices. The panel data cover a period of nine years, starting in 2009 and ending in the 2017. The verification of the mutual causality has been conducted using Granger’s causality test adapted to the panel data. The panel vector autoregression model has been applied with analysis of the structure model: orthogonal decomposition of variances of prognostic errors and analysis of the orthogonal function of impulse responses. The results show a significant causality of the profitability variables (return on total assets and return on equity) on current and accelerated liquidity ratios. On the other hand, no significant causality of liquidity ratios on profitability variables has been verified. The results are in line with the expectations from financial theory that the significant liquidity in a company per se does not have a significant impact on profitability. This research was conducted on a limited sample of listed companies on the Zagreb Stock Exchange. This suggests the implementation of similar research on a wider sample of companies listed on other stock exchanges to verify the obtained results. The originality of the research lies in the comprehensive systematization of earlier papers that investigated the causality of profitability and liquidity. In addition, the original approach to testing the mutual causality of variables liquidity and profitability using more complex statistical analysis tools has been applied.