Financial Distress and Financial Performance of Manufacturing, Construction and Allied Firms Listed in the Nairobi Securities Exchange, Kenya.
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Date
2021
Authors
Muringi, Gladys Gathoni
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
There have been an increasing trend of listed firms going through the cyle of financial distress in Kenya and some eventually being delisted from Nairobi Securities Exchange.The manufacturing, construction and allied sectors have been faced by financial difficulties in their operations that includes cash flow constraints, huge debts, continuous making of losses, dividend reduction, closure of some plants which eventually leads to decline in their financial performance. This financial distress can lead the company being bankruptcy or insolvency. The general goal of this study was to examine financial distress implications on financial performance of manufacturing, construction and allied firms listed at Nairobi Securities Exchange; Kenya. Liquidity, asset structure, leverage and firm size were the independent variables while financial performance the dependent variable. Theories of cash management, gambler’s ruin, credit risk, agency cost and trade off were utilize in the study. Descriptive research technique and census sampling were applied in this study. The targeted population were all the nine manufacturing and five construction companies listed at Nairobi Securities Exchange, Kenya. Secondary data obtained from audited annual reports of targeted firms for year 2011 to 2018 was collected with the aid of a document review guide .Panel regression model was utilized using STATA to analyse data. The findings indicated that liquidity had a statistically significant positive effect on Return on Assets, Asset structure had a negative and statistically significant effect on Return on Assets, Leverage did not have an association with Return on Assets, and finally firm size had a positive and statistically insignificant effect on Return on Assets of manufacturing, construction and allied firms listed in Kenya. Null hypothesis testing for liquidity and asset structure were rejected since their P value were less than 0.05, hence significant while that of leverage and size of the firm were not rejected since their P value were greater than 0.05 hence insignificant.The study concluded that liquidity had a positive significant effect on financial performance supporting the cash management theory which advocates for positive relationship between liquidity and financial performance. Asset structure had a negative significant effect on the financial performance meaning the firms were not able to efficiently use the fixed assets. Firm leverage had no association with financial performance and this disagreed with trade off theory of implications on high rise debts costs on leverage. Firm size had a positive statistically insignificant effect on Return on Assets that is inconsequential to financial performance when there is an increase in firm size.The study recommends that manufacturing, construction and allied firms listed at the NSE, Kenya, to increase their current assets so as to increase their liquidity as it was found that an increase in liquidity positively affect the financial performance. They are urged to use available fixed asset efficiently and effectively and avoid maintaining high proportions of fixed assets in their asset structure as they had negative significant effect on the financial performance.The management of this two sectors are ourged not to increase/decrease equity financing and debt financing since it had no association with its financial performance.Finally the study recommends to increase their firm size in ways they can gain an optimum size to enjoy economies of scale.
Description
A Research Project Submitted in Partial Fulfillment of the Requirements of the Degree in Master of Business Administration (Finance) School of Business in Kenyatta University, 2021
Keywords
Financial Distress, Financial Performance, Manufacturing, Construction, Allied Firms, Nairobi Securities Exchange, Kenya