Effect of Firm Characteristics on Financial Distress Among Non-financial Firms Listed at the Nairobi Securities Exchange

Abstract

There is an upward trend of failure of Kenyan listed firms. In order for Kenyan economy to achieve its sustainable development goals of becoming industrialized, the contributions from non-financial firms listed at NSE are critical. Despite their significance, several firms have been delisted from NSE. Most of the non-financial listed firms experience challenges in striking a compromise between surplus and shortage of working capital while others have had challenges with excess leverage leading to high interest costs. Consequently, the firms experience failure because of the inability to pay daily expenses of their operations and difficulty of exploiting new markets and undertake profitable projects. This finally leads to financial distress. The goal of the study was to see how firm characteristics affected the distress of NSE-listed non-financial companies. The study's population included all 42 NSE-listed non-financial companies. The predictor variables were financial leverage, defined as the total debt to total assets ratio in a particular year, liquidity was assessed by the current ratio, total assets natural log measuring company size, and management efficiency was measured by the ratio of total revenue to total assets per year. Altman’s Z score served as the response variable for financial distress. Secondary data was collected on a yearly basis for five years (January 2016 to December 2020). The research variables were analyzed using a descriptive design. SPSS software being utilized to conduct the analysis. The conclusions yielded a 0.469 R-square value, indicating that variations in the chosen independent variables account for 46.9 percent of changes in financial distress amongst non-financial firms, whereas other factors accounting for 53.1% of variance in financial distress amongst NSE listed non-financial firms. Independent variables had a strong relationship with company distress (R=0.685) in this study. The F statistic was significant at 5% with p<0.05, according to the ANOVA results. This demonstrated that the overall model was effective in establishing the variables' relationships. Leverage had a positive as well as statistically significant impact on financial distress, but liquidity as well as management efficiency had a negative as well as statistically significant impact on the distress of the NSE listed non-financial companies. In this research, the size of the firm had no statistical significance. This suggestion is that NSE-listed non-financial companies should focus on achieving the best degree of leverage, improving liquidity positions, and improving management efficiency, as the three factors have a substantial impact on their financial distress.