Profitability, Leverage, Efficiency and Financial Distress in Commercial and Manufacturing State Corporations in Kenya
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Date
2024-10
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Publisher
Kenyatta University
Abstract
Since attainment of independence to date, the Government of Kenya has heavily funded
and invested in various State Corporations. In spite of this State funding, Commercial
and Manufacturing State Corporations continue to struggle financially and have
resorted to the Government for debt bailouts and on many occasions, the accumulated
losses have eaten up these State Corporations, leaving huge loans that are paid from the
exchequer. In recent years, the Government of Kenya has spent billions of shillings to
fund the recovery of various cash strapped State Corporations which have not been able
to honour their debt obligations. The increased number of State Corporations facing
financial crisis in the recent past therefore prompted this study. The major goal was to
investigate effect of profitability, leverage, and efficiency on financial distress in
Commercial and Manufacturing State Corporations in Kenya. Consequently, specific
objectives included; determine effect of profitability on financial distress; analyse effect
of leverage on financial distress and to establish effect of efficiency on financial distress
in Commercial and Manufacturing State Corporations in Kenya. The study also
attempted to determine moderating effect of firm size on relationship between
profitability, leverage, efficiency and financial distress. The study adopted positivist
philosophy that required researcher to be independent of the study. Explanatory non experimental research design was used in the study. For the purposes of this study, a
census of 25 Commercial and Manufacturing Corporations was employed in study.
Study used Secondary data from audited accounts of State Corporations for period
2015-2021 in analysis. Data was obtained from office of auditor general and Kenya
Parliament digital library. Researcher used Logit Regression Model to analyse
quantitative data. Diagnostics tests included multicollinearity, heteroscedasticity and
likelihood ratio and Hosmer-Lemeshow goodness of fit tests. Study used STATA
Version 13.10 statistical software to analyse data and findings presented using tables.
Results indicated that profitability, leverage and efficiency were statistically significant
to financial distress. However, the moderating influence of firm size on the relationship
between profitability, leverage and efficiency was statistically non-significant to
financial distress. The study recommended that in order to increase profitability,
Commercial and Manufacturing State Corporations should improve their operational
efficiency and reduce leverage (use of debt) particularly the government guaranteed
loans. The study concluded that there is a dire need by State Corporations to reduce
reliance on government loans and bailouts by engaging efficiently in profitable ventures
that would maximise the wealth of the firm. The study also concluded that profitability,
leverage and efficiency were useful ratios to management, those charged with
governance and users of financial statement information in detection and mitigation of
financial distress. Findings are also useful to the government by providing an insight of
distressed firms so that the exchequer can know and make prudent decision on the
distressed State Corporations that require financial bailouts
Description
A Research Thesis Submitted to the School of Business, Economics and Tourism in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Science in Finance of Kenyatta University October 2024
Supervisors:
1. Lucy Wamugo Mwangi
2. Gerald Atheru