The Effects of Financial Distress on the Value of Firms Listed at the Nairobi Securities Exchange

Abstract

The subject of corporate financial distress has become increasingly important to stakeholders of any business as management of the precarious situation can lead to either turnaround or total collapse of the business. This study aimed at establishing the effects of financial distress on the value of firms listed at the NSE. The objectives of the study were to determine whether financial distress had any notable impact on the value of the firms listed at the NSE and whether distress risk was adequately priced by the market. Particularly, the study focussed on financial distress as predicted by Altman’s Z-score model and value of firm, proxy of which being market capitalisation. Secondary data was collected from the annual reports and financial statements of 34 companies listed at the NSE over a five-year period spanning between 2011 and 2015. Data was analysed using Microsoft Excel 2013 and SPSS version 20.0.0.0. Regression and correlation tests were conducted on the data to determine the nature and extent of the relationship between the independent variable (financial distress) and dependent variable (value of firm). Moderating variables in the study included financial leverage, profitability and quality of assets. The study revealed a strong positive relationship of 74% between the log of market capitalisation and the Altman’s Z-score. Further, the study shown that there existed a positive beta value of 0.2054 between the two variables indicating that a unit increase in Altman’s Z-score (an indicator of reduction in the level of financial distress) would lead to 0.2054 increase in the log of market capitalisation with other factors held constant.