Revisiting the trade-off theory: the role of liquidity in profitability outcomes. evidence from Southeast Asia

This study examines the relationship between capital structure, liquidity, and profitability within the Trade-Off Theory’s framework, focusing on firms operating in Southeast Asia. Utilizing various regression models, the research identifies a positive relationship between capital structure and profitability, measured as either return on assets (ROA) or net profit margin (NPM), supporting the Trade-Off Theory's premise that debt financing can enhance firm performance. Liquidity, represented by the current ratio (CR) or cash ratio (CASH), not only positively impacts profitability but also mitigates the effect of leverage, highlighting its dual role as a stabilizer and constraint. The addition of macroeconomic control variables, such as GDP growth, inflation, and firm size greatly enhances the models' ability to explain variations in corporate financial performance, highlighting the importance of the regional economic context. Additionally, return on assets (ROA) proves to be a more thorough measure of profitability compared to net profit margin (NPM), as indicated by higher R² values. This research advances the Trade-Off Theory by incorporating liquidity as a vital moderator in the relationship between capital structure and profitability, providing valuable insights into how financial strategies interact with macroeconomic conditions in the Southeast Asian corporate environment.