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.