Effect of Use of Debt Financing on the Solvency Position of Non-financial Public Listed Firms in Kenya
Abstract
Business continuity is very critical and is a concern for every business stakeholder. There are
several indicators of the business continuity but solvency position is a good estimator and
predictor of a company’s ability to continue operating as a going concern. This research sought
to determine how use of debt influences the solvency position with a view to advising business
managers on the most appropriate measures. The debt, which was measured using the natural
logarithm of the amount of liabilities of a company use, was analyzed together with levels of
business activity, board diversity and levels of competition as advised by previous literature
review. The study established that the use of debt affects the solvency position of a company
by a great margin. The coefficient of relationship was -14.36 showing that high debt levels
have a negative effect on solvency position. The results were significant at a 5% significance
level. The other variable was board diversity, which was measured by the proportion of nonexecutive
directors in the boards of the listed companies, and has been found to affect solvency
position positively. This shows that diversity in the board is good for a business to remain as a
going concern. The coefficient of relationship was 0.010615 which was however insignificant.
On competition levels, which was indicated by the number of firms operating in the same
industry, the study has established a negative significant effect with a coefficient of -4.7809
and a p-value of 0.001. This indicates that the higher the competition, the more likely that a
business will run in to solvency problems. Business activity as measured by volumes of
revenues has been found to have a positive effect on solvency. This finding shows that firms
should strive to generate more revenues as this would improve their likelihood of remaining as
a going concern. The coefficient was 6.89 and the effect is significant with a p-value of 0.000.
The constant of the equation linking the variables to the solvency of a company is 169.76 and
the factors have been found to account for roughly 16.29% of the changes in solvency position
as indicated by the R2 of 0.1629. Based on the findings of this study, it is advisable to use
moderate levels of debt and cautiously to avoid diluting the solvency positions of companies.
It is also advisable to diversify the board by having a greater proportion of non-executive
directors but it needs further evaluation and caution as it has been found to be insignificant. It
is also a recommendation that companies take measures to reduce the effects of competition
and probably by diversifying so that they cushion themselves from the negative influence.
Measures should also be taken to advance business activities to generate more revenues, which
will facilitate an improvement in the company solvency position. Further researches needs also
to be done to understand why the relations are as they are to understand what can be done to
make them favorable.
Publisher
university of Nairobi
Subject
Use of Debt FinancingRights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1411]
The following license files are associated with this item: