CHAPTER 3: RESEARCH METHODOLOGY

3.0 Introduction
This chapter discusses on the research methodology that will be adopted in the study,
which include review of the research design, research framework, type and source of data
selected, sampling technique, data collection, application of data analysis techniques to
analyze the data obtained and formulation of the research hypotheses.
3.1 Research Design
The study will assess the effect of working capital management on the profitability of
selected service and manufacturing companies in Jigjiga City. To achieve the research
objective and to test the hypotheses, the study will adopt quantitative research approach.
The researcher chooses survey research as a strategy of inquiry. The adoption of the
survey design, in the study, will have the following benefits; first, generalization process
from sample to population is the intention of a quantitative as opposed to a qualitative
researcher. In this type of research, only one sample of subjects is studied and based upon
characteristics of that sample, generalization is made back to the population where the
sample is formerly chosen. Second, it would give a chance for the researcher to produce
data based on empirical figures and thirdly, using survey design is economically viable.
This means, it can produce a large amount of data in a short time with a low cost.
Accordingly, the data for the study will be collected using structured documentary
reviews of companies’ financial statement (especially balance sheet and income
statement). Further, the survey will be cross sectional, in which data will be collected at
one point in time. The subsequent sections present a discussion of the structured survey
of documents, sampling design and data analysis in an orderly manner.
3.2 Research Framework
The research framework for this study is shown as per Figure 3.1.

Independent Variable
WCM Components
Number of days Accounts Receivable
(ARD)
Number of days Inventories (INV)
Number of days Accounts Payable
(AP)
Cash Conversion Cycle (CCC)
Dependent Variable
Profitability
Gross Operating Profit
(GOP)

Control Variables
Current Ratio (CR)
Firm Size (SIZE)
Sales Growth (GROWTH)
Debt Ratio (DEBT)
Figure 3.1: Research Framework
3.3. Description of Variables and Research Hypotheses
In this study, there are two types of variables measured; dependent and independent
variable, which the details are as follows:-
3.3.1 Dependent Variable: Gross Operating Profit (GOP)
Deloof (2003) had defined profitability as gross operating income that is measured by
sales less cash costs of goods sold, and divided by total assets less financial assets, which
financial assets refer to shares in other corporations that formed as substantial segment of
total assets. According to Deloof (2003), return on assets is not included as profitability
measurement in view that for firm that has mostly financial assets on its balance sheet,
there is less influence of the firm’s operating activity towards the return on assets of the
firm. Hence, financial assets are excluded from total assets in the computation of gross
operating income. Other researchers have also supported and applied gross operating
profit as measurement of profitability, which is computed as sales less cost of goods sold,
divided by total assets less financial assets (Lazaridis and Tryfonidis, 2006; Gill, Biger
and Mathur, 2010; Dong and Su, 2010; and Napompech, 2012).
Furthermore, according to Gill, Biger and Mathur (2010), earnings before interest tax
depreciation amortization (EBITDA) or pretax profits or net profit are not being used as
profitability measurement as they are of the view that financing activity need to be
eliminated from operational activity that may have impacts on firm’s profitability on the
whole and this is also to enable connection formed between the firm’s operational
performance with operating ratio and cash conversion cycle.
Therefore, in this study, the dependent variable refers to Gross Operating Profit (GOP),
which the formula for computation is shown below:-
Gross Operating Profit (GOP) = Sales – Costs of goods sold
Total Assets – Financial Assets
3.3.2 Independent Variable
The independent variables used in the regression model are divided into three parts,
which refer to WCM components, WCM policy and control variables, which the detailed
description of the independent variables are as per definition below:-
3.3.2.1 Working Capital Management (WCM) Components
Generally, WCM components consist of number of days account receivables (ARD),
number of days of inventories (INV), number of days accounts payable (AP) and cash
conversion cycle (CCC) as part of inclusive measurement of WCM. Thus, in order to
investigate the effect of WCM towards the profitability of a firm in services and
manufacturing sectors, WCM measurement such as ARD, INV, AP and CCC have been
applied in the panel data regression model, which the descriptions of the WCM
components are as per discussion below.
3.3.2.1a Number of days Accounts Receivable (ARD)
Accounts receivable (ARD) generally refers to average number of days it takes for a
corporation to obtain collection of payments from its clients, with the purpose of
managing its debtors by reducing the interval of time between sales and collection of
 payment from clients (Falope and Ajilore, 2009). Based on study conducted by majority
of the researchers, the formula for computation of number of days accounts receivable
(ARD) is [Accounts receivable/Sales x 365], which is supported by Deloof (2003);
Falope and Ajilore (2009); Zariyawati, Annuar, Taufiq and Abdul Rahim (2009); Gill,
Biger and Mathur, (2010), Sharma and Kumar (2011). Thus, in this study, ARD is
measured by:-
ARD = Accounts Receivable x 365 days
Sales
According to Falope and Ajilore (2009), receivables are related to the firm’s credit
collection policy, which also reflects the frequency of conversion of receivables into cash
that is an important part of the WCM. Thus, by granting trade credit, sales level can be
encouraged as it enable ample time for assessment of products by clients before payment
(Long, Malitz and Ravid, 1993; and Deloof and Jegers, 1996). However, by granting
liberal credit policy to clients, although there is an increase in profitability, but liquidity
position of the firm is surrendered (Falope and Ajilore, 2009).
Meanwhile, past literature reviews had reported that there is a significant negative
relationship between profitability and ARD (Deloof, 2003; Lazaridis and Tryfonidis,
2006; Falope and Ajilore, 2009; Gill, Biger and Mathur, 2010; Dong and Su, 2010).
Furthermore, Deloof (2003) had provided suggestion that shareholders value can be
enhanced further by lessening the number of days of accounts receivable to an acceptable
minimum level, while Lazaridis and Tryfonidis (2006) indicated that the profitability of
the firms can be improved by lowering the credit interval given to their clients.
3.3.2.1b Number of days Inventories (INV)
Another component of WCM consists of inventories, which is also known as stock that
refers to raw materials, work in progress or finished goods that are pending
manufacturing stage or sales, which the INV is computed as (Inventories/Purchases) x
365 (Falope and Ajilore, 2009; Sharma and Kumar, 2011). INV also refers to average
number of days the stock is kept by the corporation, which longer INV reflects higher
investment in inventory level
(Falope and Ajilore, 2009) that is able to minimize the risk of insufficiency of stock level
and lead to greater sales generation (Deloof, 2003). However, on the other hand, higher
investment in INV also infers slow turnover in inventory which may impact the firm’s
profitability.
Meanwhile, according to Deloof, 2003, INV is determined by [inventories x 365]/cost of
sales. This is supported by Dong and Su (2010); Gill, Biger and Mathur (2010),
Raheman, Qayyum, Afza and Bodla (2010) who had measured INV, which is also known
as inventory turnover in days as (Inventory/Cost of Goods Sold x 365 days).
Thus, in view of the unavailability of purchases information in datastream terminal, INV
in this study is computed as per following formula:-
INV = Inventory x 365 days
Cost of Goods Sold
 Based on findings by researchers such as Deloof (2003); Falope and Ajilore (2009);
Dong and Su (2010), there is a significant negative relationship discovered between
number of days inventories (INV) and profitability. Thus, an increase in profitability of a
firm can be achieved when the number of days held in inventories is reduced (Dong and
Su, 2010).
However, as per study conducted by Capkun, Hameri and Weiss (2009), there is a
significant positive relationship found between inventory performance measured by both
total inventory and its components, which refer to raw material, work-in-process and
finished goods; and financial performance of firms in manufacturing sector that is
measured by gross profit and earnings before interests and taxes (EBIT). Hence, based on
the researchers finding, there are two possible indications of relationship, either positive
or negative relationship observed between INV and profitability of firm.
3.3.2.1c Number of days Accounts Payable (AP)
Generally, accounts payable refers to suppliers who had supplied goods or services that
have not been paid by clients, which is also known as amount owing to creditors that is
deemed as free credit and computed as (Accounts payable/purchases) x 365 (Falope and
Ajilore, 2009). This formula is also supported by Deloof (2003) and Raheman, Qayyum,
Afza and Bodla (2010), which the number of days accounts payable is also known as
average payment period that is assessed as [accounts payable/purchases x 365].
Meanwhile, Lazaridis and Tryfonidis (2006); Dong and Su (2010) and Gill, Biger and
Mathur (2010) have computed AP as (accounts payable/cost of goods sold) x 365 days.
Thus, in view of as information on purchases is not available as per datastream terminal,
INV in this study is computed as per following formula:-
AP = Accounts Payable_ x 365 days
Cost of Goods Sold
According to past literature reviews, there is a significant negative relationship
established between AP and profitability as reported by Deloof (2003); Falope and
Ajilore (2009), which means that less profitable firms delay payment to suppliers in order
for firms to make evaluation of the feature or quality of products, which are also deemed
as an economical and adaptable source of finance for firms (Deloof, 2003). However, on
the other hand, firms incur high implicit cost via financing granted by suppliers should
there be a discount given by suppliers for prompt payment (Falope and Ajilore, 2009).
Thus, the higher the investment in current assets, the lesser the risk incurred which also
reflects lesser firm’s profitability (Falope and Ajilore, 2009). Nevertheless, there are also
researchers who found a significant positive association between AP and firms’
profitability, such as Dong and Su (2010), which means that there is a delay in payment
by firms with higher profitability. Thus, based on the findings by the researchers, there
are two possible indications, either positive or negative relationship found between AP
and profitability of firms.
3.3.2.1d Cash Conversion Cycle (CCC)
Richards and Laughlin (1980) had long established the principle of working capital
management by initiating the idea of CCC as a strong performance indicator for
organizing the firm’s working capital. Short cash conversion cycle denote that the
collection of receivables is prompt and the suppliers being paid at a slower pace, which
reflects improvement on the effectiveness of its in-house procedures that further
translates to greater profitability, greater net present value of cash flow and greater
market valuation of an organization (Gentry, Vaidyanathan and Lee, 1990). Meanwhile,
Besley and Brigham (2005) define a cash conversion cycle as average period of time
taken from acquisition of raw materials being paid to receivables related with sale being
collected.
Cash conversion cycle is deemed as the most dominant and prevalent measurement for
efficiency of working capital management (Gill, Biger and Mathur, 2010; and Nobanee,
Abdullatif and AlHajjar, 2011). In addition, CCC has also been adopted by other
researchers as one of the measurements of WCM in their study such as Moss and Stine
(1993); Eljelly (2004); Lazaridis and Tryfonidis (2006); Uyar (2009); Zariyawati,
Annuar, Taufiq and Abdul Rahim (2009); Nor Edi Azhar and Noriza (2010); Charitou,
Elfani and Lois (2010); Karaduman, Akbas, Caliskan and Durer (2011); and Charitou,
Lois and Halim (2012).
According to Deloof (2003); Zariyawati, Annuar, Taufiq and Abdul Rahim (2009); Gill,
Biger and Mathur, (2010), for a comprehensive determination of WCM, CCC is applied
that is computed based on [number of days accounts receivable (ARD) + number of days
inventory (INV) – number of days accounts payable (AP)]. The formula for CCC
computation is also supported by Nobanee, Abdullatif and AlHajjar, (2011), which
measured CCC as [Receivables collection period + Inventory conversion period –
Payable deferral period], meanwhile Raheman, Qayyum and Afza (2011) measured CCC
as [Receivable turnover in days + Inventory turnover in days – Payables turnover in
days).

Thus, in this study, CCC is measured by:-

CCC = Number of days Accounts Receivable + Number of days Inventory –
Number of days Accounts Payable
= ARD + INV – AP
A lengthy CCC level may linked to an increase in sales and subsequently higher
profitability gained, but, at the other hand, an extended CCC position may reflects a
lower firms’ profitability in the event the costs of investing in working capital has
escalated beyond the advantages of retaining higher inventory level and providing higher
trade of credit to clients (Akinlo, 2012).
Most of the researchers found a significant negative relationship between CCC and
profitability (Lazaridis and Tryfonidis, 2006; Falope and Ajilore, 2009; Uyar, 2009,
Zariyawati, Annuar, Taufiq and Abdul Rahim, 2009; Nor Edi and Noriza, 2010;
 Nobanee, Abdullatif and AlHajjar, 2011) which indicates that profitability can be
increased by reducing the CCC level.
However, Deloof (2003) had found an insignificant negative relationship between CCC
and gross operating income under fixed effects estimation model, in view that gross
operating income had decreases with an increase in number of days accounts receivable,
inventories as well as number of days accounts payable (AP), which have negative
relationship with profitability; and AP had been deducted in computation of CCC. The
findings by Deloof (2003) is also supported by Akinlo (2012), who found an insignificant
negative relationship between CCC and profitability measured by return on assets (ROA)
in fixed effects estimation model, which is due to profitability decreases as a result of an
increase in the number of days accounts receivables, inventories and number of days
accounts payable that has been deducted in CCC calculation.
Meanwhile, Padachi (2006) had found a positive association between CCC and
profitability for Mauritian small manufacturing firms, which the positive relation is
further supported by Gill, Biger and Mathur (2010); Charitou, Lois and Halim (2012).
Thus, based on the researchers’ findings, there is a mixture of positive and negative
relationship observed between CCC and firm’s profitability.

3.3.3 Control Variables

The current ratio, firm size, sales growth and debt ratio variables are included in the
regression analysis for control purpose. The control variables are employed to measure
the significance of association between variables and to determine the extent of the
independent variables influence towards the dependent variables.
3.3.3.1 Current Ratio (CR)

Based on past study conducted by Sharma and Kumar (2011), current ratio has been
included in the model as control variable and is computed as current assets divided by
current liabilities. Other researchers that had also included current ratio as part of the
control variables in the regression model (Charitou, Lois and Halim, 2012). Current ratio
has been included in the model regression partly due to its role as measuring liquidity
position of the firm traditionally (Zariyawati, Annuar, Taufiq and Abdul Rahim, 2009), as
compared to CCC as a dynamic measurements for liquidity management (Jose, Lancaster
and Stevens, 1996). Thus, the formula for computing current ratio is as follows :-
Current Ratio = Current Assets__
Current Liabilities
Higher current ratio is associated with lower profitability and vice versa due to the trade-
off relationship between liquidity and profitability. Based on past literature view, Eljelly
(2004) had found a significant negative relationship between profitability and liquidity
position of firms that is computed by current ratio. Based on study conducted by
Charitou, Lois and Halim (2012), there is also a negative relation reported between
current ratio and profitability measured by return on assets (ROA).
3.3.3.2 Firm Size (SIZE)
In this study, the effect of firm size on firm’s profitability is also being evaluated. The
purpose of including firm size in this study as a control variable is to determine the extent
of firm size effect on the study of relationship between WCM and firm’s profitability.
Larger firms are deemed to have a positive impact on performance in view that larger
firms have various capabilities and enjoy economies of scale (Falope and Ajilore, 2009;
Akinlo, 2012), faced fewer information irregularity and ability to exploit market power
(Akinlo, 2012; Shepherd, 1986) both in product-markets and factor-markets as compared
to smaller firms which experienced limitation in obtaining financing and faced higher
cost of external funding (Akinlo, 2012). However, on the other hand, larger firms also
faced coordination problems which can negatively influence performance, unlike smaller
firms which are simple to monitor and organized (Falope and Ajilore, 2009).
In the past study, there are several forms of definition being adopted in measuring firm
size. Based on the past study conducted, the most commonly used measurements for firm
size is natural logarithm of sales (Deloof, 2003; Lazaridis and Tryfonidis, 2006; Gill,
Biger and Mathur, 2010; Raheman, Afza, Qayyum and Bodla, 2010) and natural
logarithm of total assets (Falope and Ajilore, 2009; Nazir and Afza, 2009; Sharma and
Kumar, 2011).
In this study, firm size is measured based on natural logarithm of sales, as it is one of the
most commonly used proxies for firm size. Furthermore, according to Raheman, Afza,
Qayyum and Bodla (2010), the natural logarithm of sales has been applied in
computation of size of firms, in view that it is able to lessen the heteroskedasticity and
lower the effect of outliers in the regression model.
Firm Size = ln (Sales)
Based on past literature review, Deloof (2003); Lazaridis and Tryfonidis, 2006;
Raheman, Afza, Qayyum and Bodla (2010); Akinlo (2012); Charitou, Lois and Halim
(2012) had found a positive relationship between firms size with the profitability of the
firms, which indicates that the larger the size of the firms, the higher the firms’
profitability in view of the economies of scales enjoyed that has transformed firms to
higher profitability. However, on the other hand, according to Evanoff and Fortier (1988)
and Michael (1985), there is a negative effect of firm size on profitability in view that the
positive impact on firms’ profitability as a result of economies of scale might be partly
offset via diversification of assets by firms, which resulted in a lesser risk and lesser
return as per the portfolio theory. Therefore, based on past literature review, the expected
result on the relationship between firm size and profitability may be positive or negative
relationship.
3.3.3.3 Sales Growth (GROWTH)

One of the control variables that is used in the regression by Zariyawati, Annuar, Taufiq
and Abdul Rahim (2009) is (Sales1 – Sales0)/Sales0 while Deloof (2003) computed sales
growth as [(this year’s sales – previous year’s sales)/previous year’s sales]. Other
 researchers which have also included sales growth as part of the control variables in their
studies are Falope and Ajilore (2009) and Nazir and Afza (2009).
Thus, in this study, sales growth is measured by the following formula:
Sales Growth = Sales1 – Sales0
Sales0
According to Akinlo (2012), sales growth is anticipated to have a positive relation with
profitability in view that higher achievement in sales growth is derived as a result of
better quality of product or services, lesser time required to evaluate the quality of the
products, which leads to lower accounts receivables days and positive impact on
profitability. The positive association between sales growth and profitability is also
supported by other researchers (Deloof, 2003; Zariyawati, Annuar, Taufiq and Abdul
Rahim, 2009; Raheman, Afza, Qayyum and Bodla, 2010).
3.3.3.4 Debt ratio (DEBT)
Deloof (2003) had also used financial debt ratio as control variable, which is measured by
using financial debt divided by total assets, while Gill, Biger and Mathur (2010) defined
financial debt ratio as short-term loans plus long-term loans divided by total assets.
Furthermore, other researchers that have also included DEBT as control variables had
measured debt ratio as total debt over total assets (Zariyawati, Annuar, Taufiq and Abdul
Rahim, 2009; Nor Edi Azhar, and Noriza, 2010; Sharma and Kumar, 2011). Hence, in
this study, debt ratio is computed using following formula :-
Debt ratio = Total Debt
Total Asset
According to Charitou, Lois and Halim (2012); they found a significant negative
relationship between debt ratio and profitability of the firms, as an increase in debt level
raises the interest expense and the possibility of firms defaulting, which profitability is
negatively affected. This finding is supported by other studies who also found an inverse
significant relationship between debt ratio and profitability (Deloof, 2003; Zariyawati,
Annuar, Taufiq and Abdul Rahim, 2009).

3.5 Development of Hypotheses

Based on the research question and research objectives developed in chapter 1, there are
seven hypotheses constructed in this study to investigate on the three key areas which are
(i) the effect of WCM components, (ii) the effect of WCM policies towards profitability
of firms and (iii) the differences between mean profitability of firms under services and
manufacturing sector in Malaysia during the period of 2006 to 2010.
3.5.1 The Effect of WCM components on Profitability of firms
The hypotheses formed to investigate on the effect of WCM components on profitability
of firms can be summarized based on following four hypotheses constructed to examine
on the effect of number of days Accounts Receivable (ARD), number of days Inventories
(INV), number of days Accounts Payable (AP) and Cash Conversion Cycle (CCC)
 towards profitability of firms under services and manufacturing sector during the period
of 2006 to 2010.
The four hypotheses constructed to investigate on the effect of WCM components on
firm’s profitability, which the null and alternative hypotheses are summarized as
follows:-
Hypothesis (H1): There is no significant relationship between Number of days Accounts
Receivable (ARD) and Gross Operating Profit (GOP) of the firms.
Hypothesis (H2): There is no significant relationship between Number of days
Inventories (INV) and Gross Operating Profit (GOP) of the firms.
Hypothesis (H3): There is no significant relationship between Numbers of days
Accounts Payable (AP) and Gross Operating Profit (GOP) of the firms.
Hypothesis (H4): There is no significant relationship between Cash Conversion Cycle
(CCC) and Gross Operating Profit (GOP) of the firms.
3.5 The differences between mean profitability of firms under Services and
manufacturing sector in jigjiga

The null and alternative hypotheses to investigate on the differences between mean
profitability of firms under services and manufacturing sector in Malaysia are
summarized as follows:-
Hypothesis (H5): There is no significant difference between the mean profitability of
services sector and manufacturing sector

3.2 Data Source and Collection Methods

It is crucial that the data collected and the method used in a research work affect its
outcome. Therefore, the data for the study will be collected using structure documentary
reviews of target companies audited financial statements like balance sheet and income
statement. Since the required data for the study is more of quantitative, appropriate data
couldn’t be collected using simply distributed questionnaires to the company’s managers
or other concerned bodies. For this reason, reviewing selected companies balance sheet
and income statement items would be the right avenue to determine coefficient of
correlation and regression analysis between working capital management and firm’s
profitability. Additionally, it is preferred for its convenience and cost effectiveness.
However, the main problem of using secondary data would be lack of accessibility of
getting relevant source of information directly from selected companies (lack of
willingness) and its reliability. By considering the above problems and to excel the
reliability of data, it will be collected from regional revenue and custom authority from
which audited financial statement is directly submitted by the taxpaying companies to the
office.
3.3 Sampling Technique / Design
3.4 Data Analysis Techniques
In this study, panel data regression analysis will be used due to it assumptions that
firms are heterogeneous, fewer multicolinearity problems between variables and higher
degree of freedom, which resulted in higher efficiency of the estimator (Baltagi, 2001).
Balanced panel data will be used in this study in view of the characteristic of data used,
which involves both cross sections and time series. According to Hsiao, Mountain and
Ho-Illman (1995), one of the main advantages of using panel data sets is improvement in
the efficiency of econometric estimates, in view that panel data has higher degrees of
freedom and various sample flexibility than cross-sectional data that may be observed as
a panel with T=1, or time series data with a panel of N=1.
Panel data models are estimated upon determining the correlation between unobservable
heterogeneity ηi of each firm and the explanatory variables, which the fixed or random
effects selection is by applying Hausman (1978).test under null hypothesis E(ηi/Xi,t) = 0
(Falope and Ajilore, 2009). Thus, fixed effects method will be selected as compared to
the random effects estimation in view that based on Hausman test result, as reflected by
the Chi-Square statistic revealed mostly significant at 0.01 levels in all the models. In all
the regression models, the standard errors are computed by applying White’s correction
for heteroscedasticity, as adopted in the study by Deloof (2003) and Padachi (2006).

3.5 Panel Data Regression Model

There are five panel data regression models developed in order to test on the hypotheses
developed on the effect of WCM components towards firm’s profitability measured by
GOP. In this study, the regression models are derived based on model developed by
Sharma and Kumar (2011). The model is further supported by researchers which have
analyzed the effect of individual WCM components separately towards the profitability
of firms, 67 such as Deloof (2003), Padachi (2006), Falope and Ajilore (2009), Gill,
Biger and Mathur (2010), Akinlo (2012).
This study will also use balanced panel data regression model in analyzing on the effect
of WCM components of firm i in period t towards the firm’s profitability in services and
manufacturing sectors in Jigjiga during the period of 2009 to 20123. Thus, there are four
panel data regression models formed for this study to test on the hypotheses developed.

Model 1: The effect of ARD on profitability of firms

GOPi,t = β0 + β1ARDi,t + β2CRi,t + β3SIZEi,t + β4GROWTHi,t + β5DEBTi,t + ηi + λt + εi,t
Model 2: The effect of INV on profitability of firms
GOPi,t = β0 + β1INVi,t + β2CRi,t + β3SIZEi,t + β4GROWTHi,t + β5DEBTi,t + ηi + λt + εi,t
Model 3: The effect of AP on profitability of firms
GOPi,t = β0 + β1APi,t + β2CRi,t + β3SIZEi,t + β4GROWTHi,t + β5DEBTi,t + ηi + λt + εi,t
Model 4: The effect of CCC on profitability of firms
GOPi,t = β0 + β1CCCi,t + β2CRi,t + β3SIZEi,t + β4GROWTHi,t + β5DEBTi,t + ηi + λt + εi,t
Where profitability of the firms refer to GOP, while i stands for the ith firm, t stands for
year t, and the variables are defined as follows:-
GOPi,t : Gross Operating Profit of firm i at time t
ARD i,t : Number of days Accounts Receivable of firm i at time t
INV i,t: Number of days Inventories of firm i at time t
AP i,t : Number of days Accounts Payable of firm i at time t
CCC i,t : Cash Conversion Cycle of firm i at time t
WCIP i,t : Working Capital Investment Policy of firm i at time t
WCFP i,t : Working Capital Financing Policy of firm i at time t
CR i,t : Current Ratio of firm i at time t
SIZE i,t : Firm Size of firm i at time t
GROWTH i,t : Sales Growth of firm i at time t
DEBT i,t : Debt ratio of firm i at time t
β0 : Intercept coefficient
ηi : Individual firm effect assumed constant for firm i over t
λt: Time specific effect assumed constant for given t over i
εi,t : Time varying disturbance term serially uncorrelated with mean zero and variance 1.
Random error term for firm i at time t