Firm Specific Factors and Financial Distress: Evidence From Large Manufacturing Firms in Kenya

Abstract

Businesses are often founded with the hope that they infinitely operate into the foreseeable future and increase investors’ value with no need to suspend operations or close business. This may not be the reality as companies at some point will be faced by financial difficulties and the measures taken will determine if they survive or are forced to dissolve. The objective of the study was to establish the effect of Firm Specific Factors and financial distress among Large Manufacturing Firms in Kenya. Firm specific factors utilized in the current study included; liquidity, leverage, and profitability. The theories utilized in the current study were; the Wreckers Theory, Trade-off Theory, Credit Risk Theory, Agency Theory and Pecking Order Theory. The target population was the 1045 manufacturing firms in Kenya. Convenience sampling was used in the current study ultimately deriving a sample of 22 large manufacturing firms. Secondary sources of data were employed. The study applied both descriptive statistics as well as inferential statistics that entailed correlation and multiple linear regression analyses. The study findings were that the manufacturing firms are generally in the grey zone and safe zone and the companies are not likely to be headed towards bankruptcy and that only about 25% of the manufacturing firms are likely to be headed towards bankruptcy. Additionally, the current study findings established that the manufacturing firms generally have a range of not having a good current ratio to having a good current ratio and that only about 50% of the manufacturing firms have a good current ratio. The study findings further established that the manufacturing firms’ general solvency situation ranges from being a cause for concern to being good and that about 50% of the manufacturing firms have a good solvency situation, 25% are risky, while another 25% have a solvency situation which is a cause of concern. Further findings were that only liquidity and profitability had a significant correlation to financial distress. Further, the findings indicated that they are both negatively significantly correlated with financial distress. Additional study findings were that the firm specific factors entailing liquidity, leverage, and profitability explained financial distress to a large extent and they can significantly influence financial distress. Also, only the firm specific factors, liquidity and leverage were found to have a significant relationship with financial distress. They both had positive significant relationships with financial distress. Policy and practice recommendations were made to policy makers in the trade and industry sector, specifically the Ministry of Trade, Investment, and Industry, as well as the Kenya Investments Authority and Kenya Trade Network Agency, and also the capital markets regulator, the Capital Markets Authority to focus on the firms’ internal factors to detect and avert imminent financial distress and bankruptcy. Further recommendations are that they should continually monitor the solvency situation of firms by analyzing and monitoring the internal firm factors. Additional recommendations are that they should monitor and be wary of firms rapidly scaling up their operations. Final recommendations are that they ought to surveil borrowing levels in the capital structure of firms to ensure that it does not exceed the optimal levels. Recommendations are also made to the manufacturing firms, as well as other commercial firm’ management and consultants, lenders, and investors to focus on firm specific factors to predict, monitor, and mitigate financial distress and bankruptcy. Additional recommendations made to the practitioners to scale their operations sustainably and recommendations are also made to the lenders and investors to monitor firms which are scaling up rapidly. Final recommendations to firm practitioners are that they should uptake optimal debt in their respective firms’ capital structure and also recommendations are made to lenders and investors to monitor firms’ uptake of debt.