Financial Structure and Financial Distress of Listed Commercial and Services Firms at the Nairobi Securities Exchange, Kenya

Abstract

In the recent years, listed firms at Nairobi Securities Exchange have faced mixed performances financially some even experiencing massive financial distress and being delisted regardless of the sector. While many factors have been attributed to this, other scholar indicate that financial structure is to blame. This study sought to determine the effect of financial structure on financial distress of the listed non-financial firms in Kenya focusing on debts, retained earnings and shareholders capital. The study sought to anchor on the Pecking Order theory, MM theory, Cash Flow and Trade-Off theory. An explanatory design was adopted and the focus was on the 11 firms in commercial and services sector by the year 2019. To achieve the objectives, secondary data, spanning 5 years up to 2019 was used. Using this data, descriptive statistics, diagnostic tests, correlation and regression analysis were conducted. Before deciding on the use of either a random or fixed effect panel model, the study used Hausman specification method. The regression model was a random effect panel. The ideal software adopted was STATA version 13. The results on Altman Z score indicated that majority of the companies trading under commercial and services in NSE were experiencing low Altman Z score a clear indication of financial distress. There was a huge variations in the amount borrowed by various companies and when compared to short term borrowing results, it is clear that short term mean average borrowings was greater mean average long term borrowing. The results on retained earnings were low showing that majority of the companies had negative retained earnings reserves. The findings on ordinary share capital presented that on average the share capital amount remained constant for the period under consideration. The study concluded that short-term debt had a negative and significant influence on Altman Z score. The study concluded that long term debt had a negative and significant effect on Altman Z Score. The study concluded that retained earnings had a positive and significant effect on Altman Z Score. Therefore, retained earnings increase reduces the financial distress in a company. The study concluded that ordinary shareholders capital has insignificant effect on Altman Z score values and that its changes does not have any significant effect of financial distress. The study recommends alternative source of financing for these companies such as ordinary share capital and retained earnings. The companies should avoid high leverage ratio.