Firm Characteristics and Financial Distress among Manufacturing Firms Listed at Nairobi Securities Exchange Kenya

Abstract

Businesses including companies listed on stock markets strive to predict financial distress to ensure they manage the factors that could potentially lead to such distress. It is however not clear how the various factors affect financial distress particularly firm size; firm activity levels; firm financial leverage; and profitability given that these are some of the biggest determinants of the financial condition of a business. The lack of clarity results from the fact that there are numerous models of financial distress with each providing varying factors some often contradicting each other. It is therefore critical to evaluate how these affects financial distress among manufacturing firms listed at Nairobi Security Exchange (NSE). This study aims to evaluate how firm size, turnover, leverage and profitability influence financial distress as measured by the B-Ratio. This census survey with a population of 13 companies covers the period 2013 to 2022. Three companies however did not meet the data criteria and were therefore excluded from the analysis. This left 100 firm-year observations. The study utilized four theories of financial distress that include neoclassical theory of investment; liquidity preference theory; pecking order theory; and Wreckers theory of financial distress. The study used panel regression analysis to test the hypotheses that firm size, turnover, leverage and profitability have no significant influence on financial distress. Hausman model specification test revealed that the fixed effects panel regression model was the most appropriate for analysis and it was subsequently used in arriving at the inferential findings. T-test and p-value at 95% confidence interval were used in hypotheses testing. All the four hypotheses set for the study were rejected and it was concluded that size, activity, leverage and financial performance are significant determinants of financial distress. The findings reveal that whereas firm size (as shown by firm capitalization ratio), firm activity level (as shown by total asset turnover) and firm profitability (as shown by return on equity) all had a negative effect on B-ratio, financial leverage had a direct positive effect on financial distress. The study was limited to the 10 qualifying companies at the NSE and has suggested that similar studies could be expanded to non-listed companies, listed nonmanufacturing companies as well as with the use of different models such as hazard models.