Financial Distress and Performance of Selected Firms Listed at Nairobi Securities Exchange, Kenya.

Abstract

Manufacturing and construction sectors are core enablers that will ensure Kenya becomes an industrialized country with the muscle to compete globally. However, slow industrial growth and poor performance registered by firms under construction and manufacturing sectors may derail the attainment of this goal. Companies in the Manufacturing and construction sectors have been experiencing financial distress. The general objective of the study was to investigate the effect of financial distress on the performance of selected firms listed at Nairobi Securities Exchange, Kenya. The specific objectives were to examine effect of liquidity, leverage, firm size and inventory conversion period on financial performance of selected distressed firms listed at Nairobi Securities Exchange. The study which may be of value to financiers, policymakers, investors and researchers was supported by four theories and one model, namely; cash flow theory, Modigliani-Miller Theorem, economies of scale theory, economic order quantity model and profit maximization theory. The study will adopt an explanatory research design. The target population of the study was all the 13 firms under manufacturing, construction as well as allied sectors quoted at Nairobi Securities Exchange. The study utilized purposive sampling design in the selection of the financial distressed firms under manufacturing, construction as well as allied sectors. Secondary panel data collected from published financial statements of the entire four financially distressed firms listed under manufacturing, construction and allied sectors covering 10 years (2009-2018) were utilized. Descriptive as well as inferential statistics was deployed to analyze panel data with support of statistical software (STATA, V.14). Regression analysis was used to test four hypotheses at 95% confidence level and diagnostic tests were performed before conclusions were drawn. Findings were presented in table format and supported by narrations. The study found that liquidity has positive significant effect on financial performance return on assets (p-value=0.004) and return on equity (p-value=0.002) in selected firms at Nairobi Securities Exchange. This study also found that leverage had positive, but insignificant effect on financial performance return on assets (p-value=0567) and return on equity (p-value=0.812) in the selected firms quoted at Nairobi Securities Exchange. The researcher further revealed that firm size had positive and insignificant effect on financial performance return on assets (p-value=0.099) in selected firms listed at Nairobi Securities Exchange but significant effect on return on equity (p-value=0.021). In addition, the study found that inventory conversion period has an inverse and significant effect on financial performance return on assets (p-value=0.041) and return on equity (p-value=0.007) in the selected firms at Nairobi Securities Exchange. The study recommends that listed firms at Nairobi Securities Exchange ought to increase their liquidity to enhance their working capital thereby improving their performance and making the businesses sustainable. In addition, the government of Kenya and policy makers should develop policies to regulate the liquidity of firms Listed in Nairobi Securities Exchange so as to ensure an improvement in the financial performance of firms listed at the NSE. In addition, manufacturing, construction and allied firms should always seek to increase their total assets so as to increase their performance in terms of ROE. Manufacturing, construction and allied firms should increase their assets by obtaining modern equipment for use in construction and production processes. The policymakers should develop policies to regulate inventory conversion period among manufacturing, construction and allied firms listed at the NSE.