The Effect of Firm Characteristics on Financial Distress of Selected Retail Supermarket Chains in Nairobi City County, Kenya

Abstract

Company under financial distress plunges into a strained cash situation and is unable to pay debts as they become due, this state of affairs can compel an organization into liquidation or bankruptcy. A company’s ability to stay operational is considered to be greatly linked to its characteristics like efficiency, liquidity, firm size, and leverage. The study objective was to demonstrate the effect of firm characteristics on the the financial distress of selected retail supermarket chains in Nairobi city county, Kenya. The study was anchored on Operating Cycle Theory, The Trade-off Theory and The Agency Theory. Descriptive research design was adopted to demonstrate the effect of firm characteristics on financial distress of selected retail supermarket chains in Nairobi City County, the target population of this research dealt with the nine (9) selected retail supermarket chains in Nairobi City County; secondary data sources were applied. For data analysis, SPSS software was utilized, descriptive and inferential statistics were used to analyze the case. The study revealed that retail supermarket chains in Nairobi experienced financial distress in the years 2020 and 2021; adequate liquidity provides a buffer against financial distress, while poor liquidity management can increase the risk of facing financial difficulties. Efficient management practices perform an important role in mitigating or preventing financial distress and that larger chains enjoy access to resources that provide a buffer against financial distress, the study concludes that increase in firm liquidity, financial leverage, management efficiency and firm size each of them have vital influence on the financial distress of selected retail supermarket chains in Nairobi City County. As per the results of the research, it was proposed that there is a necessity by the retail supermarket chains in Nairobi City to effectively manage their working capital to ensure they have enough liquidity to cover short-term and long-term obligations, striking the right balance between debt and equity financing is crucial for retail supermarket chains in Nairobi City to effectively manage financial distress risks and maintain a stable financial position and that it is important to adopt strong management practices in strategic planning, cost control, inventory management, human resource management, customer service, and overall decision-making.