Profitability, Leverage, Efficiency and Financial Distress in Commercial and Manufacturing State Corporations in Kenya
Keywords:Profitability, Leverage, Efficiency, Firm Size, Financial Distress
Purpose: The major goal was to investigate effect of profitability, leverage, and efficiency on financial distress in Kenya's State Corporations in the commercial and manufacturing sector. The study also attempted to determine moderating effect of size on relationship between profitability, leverage, efficiency, and financial distress in Kenyan Commercial and Manufacturing Corporations.
Methodology: Positivist philosophy and explanatory non-experimental research approach were used in this investigation. The study's population consisted of 25 State Corporations in Kenya in Commercial and manufacturing category. For the purposes of this study, a census of all 25 Commercial and Manufacturing Corporations was employed in study. Secondary data from audited accounts of state corporations for period 2015-2020 was used in analysis. Binary logistic regression was used in analysis. Diagnostics tests included multicollinearity, heteroscedasticity, likelihood ratio and autocorrelation tests. STATA statistical software was used to analyse data. Findings were presented using tables.
Findings: The research outcomes indicated that profitability had significant effect on financial distress of commercial and manufacturing state corporations. Results also indicated that leverage had insignificant effect on financial distress. Efficiency also had significant effect on financial distress. The study adopted the product term interaction model approach in testing moderating effect of firm size on relationship between profitability, leverage and efficiency on financial distress. There was evidence showing that firm size significantly moderated the relationship between efficiency and financial distress in commercial and manufacturing state corporations in Kenya.
Unique Contribution to Theory, Practice and Policy: This study relied on Agency, Stewardship, Efficiency, Pecking-order and Trade-off theories.The results indicated that profitability and efficiency variables are useful to management, those charged with governance and users of financial statement information in detection and mitigation of financial distress. The management and users of financial statements information should pay attention particularly to profitability and efficiency ratios. Findings are also useful to the government by providing an insight of distressed firms so that the exchequer can know and make prudence decision on the distressed state corporations that require financial bailouts. Lastly, this study adds a contribution to the limited literatures on financial distress in commercial and manufacturing state corporations in Kenya.
Abdioğlu, N. (2019). The impact of firm specific characteristics on the relation between financial distress and capital structure decisions. İşletme Araştırmaları Dergisi, 11(2), 1057-1067.
Alemu, S. (2015). Determinants of Commercial Banks Profitability: The Case of Ethiopian Commercial Banks. Unpublished MBA Thesis, Addis Ababa University
Amoa‐Gyarteng, K. (2019). Financial characteristics of distressed firms: an application of the Altman algorithm model. Journal of Corporate Accounting & Finance, 30(1), 63-76.
Ang, A., & Longstaff, F. A. (2013). Systemic sovereign credit risk: Lessons from the US and Europe. Journal of Monetary Economics, 60(5), 493-510.
Arkhipova, Dibrov, Beskrovnaya & Shchukina (2016). Functions of state-owned corporations in the structure of the public sector of the Russian Federation. SHSWeb of Conferences01008 (2016).
Atosh, A. M., & Iraya, C. (2018). Effect of corporate governance practices on financial distress among listed firms at Nairobi securities exchange. Journal of International Business, Innovation and Strategic Management, 2(2), 70-90.
Azad, A. M. S., Raza, A., & Zaidi, S. S. Z. (2018). Empirical relationship between operational efficiency and profitability (Evidence from Pakistan Exploration Sector). Journal of Accounting, Business and Finance Research, 2(1), 7-11.
Bahri, F., Purba, R. B., & Khamilah, O. (2022). Financial Ratio Analysis to Predict Financial Distress at PT. Perkebunan Nusantara IV (Persero) Medan. Economit Journal: Scientific Journal of Accountancy, Management and Finance, 2(2), 105-115.
Baimwera, B. & Muriuki, A. M. (2014). Analysis of corporate financial distress determinants: A survey of non-financial firms listed in the NSE. International Journal of Current Business and Social Sciences, 1 (2), 58-80.
Bernardin, D. E. Y., & Tifani, T. (2019). Financial distress predicted by cash flow and leverage with capital intensity as moderating. e-Jurnal Apresiasi Ekonomi, 7(1), 18-29.
Burton-Jones, A., McLean, E. R., & Monod, E. (2015). Theoretical perspectives in IS research: from variance and process to conceptual latitude and conceptual fit. European journal of information systems, 24(6), 664-679.
Cooper, D. & Schindler, P. (2009). Business Research methods (9thed.) McGraw Hill Companies.
Dirman, A. (2020). Financial distress: the impacts of profitability, liquidity, leverage, firm size, and free cash flow. International Journal of Business, Economics and Law, 22(1), 17-25.
Diyanto, V. (2020). The effect of liquidity, leverage and profitability on financial distress. Indonesian Journal of Economics, Social, and Humanities, 2(2), 127-133.
Dudovskiy, J. (2018). Exploratory research. J. Dudovsiky, Writing a Dissertion. Sage Publications. Retrieved from Business Research Methodology.
Dwiantari, R. A., & Artini, L. G. S. (2021). The effect of liquidity, leverage, and profitability on financial distress (case study of property and real estate companies on the idx 2017-2019). American Journal of Humanities and Social Sciences Research (AJHSSR), 5(1), 367-373.
El-Ansary & Bassam (2019), Forecasting financial distress for listed MENA firms. Department of Business Administration, faculty of commerce, Cairo University, Giza, Egypt.
Fatimah, F., Toha, A., & Prakoso, A. (2019). The Influence of Liquidity, Leverage and Profitability Ratio on Finansial Distress:(On Real Estate and Property Companies Listed in Indonesia Stock Exchange in 2015-2017). Owner: Riset dan Jurnal Akuntansi, 3(1), 103-115.
Fiebelkorn, A., Owuor, C., & Nzioki, D. (2021). Kenya State Corporations Review: Corporate Governance and Fiscal Risks of State Corporations.
Finishtya, F. C. (2019). The role of cash flow of operational, profitability, and financial leverage in predicting financial distress on manufacturing company in Indonesia. Jurnal Aplikasi Manajemen, 17(1), 110-117.
Fisseha, F. L. (2015). meta analysis on the determinants of commercial bank's profitability:(a conceptual frame work and modelling). european scientific journal, 11(19).
Gersonskaya, I. (2020, January). Leading Role of the Public Sector in the Digitalisation of Economy. In 5th International Conference on Social, Economic, and Academic Leadership (ICSEALV 2019) (pp. 228-234). Atlantis Press.
Gichaiya, M. W., Muchina, S., & Macharia, S. (2019). Corporate risk, firm size and financial distress: evidence from non-financial firms listed in Kenya.
Gill, J. and Johnson, P. (2010) Research Methods for Managers (fourth edition). London: Sage.
Glinkowska, B., & Kaczmarek, B. (2015). Classical and modern concepts of corporate governance (Stewardship Theory and Agency Theory). Management, 19(2), 84-92.
Gujarati, D. N., & Porter, D. C. (2003). Autocorrelation: What happens if the error terms are correlated. Basic econometrics, 441-505.
Hair Jr, J. F., Sarstedt, M., Hopkins, L., & Kuppelwieser, V. G. (2014). Partial least squares structural equation modeling (PLS-SEM): An emerging tool in business research. European business review.
Hamdamov, O. (2017), financial crisis management in large state owned enterprises in Uzbekistan: distance to default and financial analysis, international journal of economic, commerce and Management, Vol v, Issue 7, July 2017
Harris, J., Imbert, B., Medas, P., Ralyea, J., & Singh, A. (2020). Government support to state-owned enterprises: Options for Sub-Saharan Africa. IMF Fiscal Affairs, Special Series on COVID-19, International Monetary Fund, Washington, DC
Hu, H. (2011). A study of financial distress prediction of Chinese growth enterprises. University of Canberra.
Ikpesu F. (2019), specific determinants of financial distress, Empirical evidence from Nigeria, Journal of Accounting & Taxation, Vol 11(2) PP49-56, and March 2019
Isayas, Y. N. (2021). Financial distress and its determinants: Evidence from insurance companies in Ethiopia. Cogent Business & Management, 8(1), 1951110.
Islam, T., & Erum, T. O. O. R. (2019). Power comparison of autocorrelation tests in dynamic models. International Econometric Review, 11(2), 58-69.
Jensen, C. M., & Meckling, H. W. (1976). Theory of firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305– 360.
jerop, L. N. (2021). validity of the multiple discriminate analysis failure prediction model on corporate financial distress: an analysis of the kenyan market.
Kanyugi, M. G. (2016). The effects of financial distress on the value of firms listed at the Nairobi securities exchange (Doctoral dissertation, University of Nairobi).
Karina, R., & Soenarno, Y. N. (2022). The impact of financial distress, sustainability report disclosures, and firm size on earnings management in the banking sector of Indonesia, Malaysia, and Thailand. Accounting and Management Information Systems, 21(2), 289-309.
Kihooto, E., Omagwa, J., Wachira, M., & Emojong, R. (2016). Financial distress in commercial and services companies listed at Nairobi Securities Exchange, Kenya.
Kim, J. H. (2019). Multicollinearity and misleading statistical results. Korean journal of anesthesiology, 72(6), 558.
Kimia, (2019), Interrogating problems facing State Corporations in Kenya, SSRG, International Journal of Economics & Management studies Vol 6 issue 6, June 2019
Koch, S., (2016), the secret to successful state owned enterprises is how they are run, the conversation Journal, Koch Steve, University of Pretoria.
Kosikoh, J. C. (2014). Determinants of Financial Distress in Insurance Companies in Kenya. Jomo Kenyatta University of Agriculture and Technology.
Liahmad, K. R., Utami, Y. P., & Sitompul, S. (2021). Financial Factors and Non-Financial to Financial Distress Insurance Companies That Listed in Indonesia Stock Exchange. Budapest International Research and Critics Institute (BIRCI-Journal): Humanities and Social Sciences, 4(1), 1305-1312.
López-Gutiérrez, C., Sanfilippo-Azofra, S., & Torre-Olmo, B. (2015). Investment decisions of companies in financial distress. BRQ Business Research Quarterly, 18(3), 174-187.
Lord, J., Landry, A., Savage, G. T., & Weech-Maldonado, R. (2020). Predicting nursing home financial distress using the Altman Z-Score. Inquiry: The Journal of Health Care Organization, Provision, and Financing, 57, 0046958020934946.
Macharia K, (2020), Amount of debt guaranteed by the Government to various State Corporations increased by Ksh 20 Billion, Financial Standard 2020
Mahardini, N. Y. (2023). An Analysis Of Factors Affecting The Financial Distress: The Case Of SOEs In Indonesia. JAK (Jurnal Akuntansi) Kajian Ilmiah Akuntansi, 10(1), 172-185.
Maina, F. G., & Sakwa, M. M. (2017). Understanding financial distress among listed firms in Nairobi stock exchange: A quantitative approach using the Z-score multi-discriminant financial analysis model.
Maina, L. M. (2018). A Study on the Determinants of Financial Distress in Small and Medium Enterprises: a Case Study of Nairobi County (Doctoral dissertation, university of nairobi).
Manyeruke, R. (2018). An evaluation of the factors that cause financial distress in parastatals: a case of ZESA Group of Companies (2012-2017) (Doctoral dissertation,BUSE).
Marimuthu, F. (2021). Factors driving the financial performance of state-owned enterprises in an emerging market. International Journal of Entrepreneurship, 25(7), 1-17.
Masdupi, E., Tasman, A., & Davista, A. (2018, July). The influence of liquidity, leverage and profitability on financial distress of listed manufacturing companies in Indonesia. In First Padang International Conference On Economics Education, Economics, Business and Management, Accounting and Entrepreneurship (PICEEBA 2018) (pp. 389-394). Atlantis Press.
Mbatha , A., (2020), South Africa curtails debt guarantees for state owned companies, Bloomberg
Mihyo, P. B., & Mukuna, T. E. (2018). Interface between Formal and Informal Systems of Horizontal Accountability in Kenya's State-Owned Enterprises. Eastern Africa Social Science Research Review, 34(2), 101-131.
Mugenda O. (2003), Research methods, quantitative & qualitative approaches, Africa Centre for studies
Muigai & Muriithi, (2017), the Moderating Effect of Firm Size on the Relationship between Capital Structure and Financial Distress of Non-Financial Companies Listed in Kenya, Journal of Finance and Accounting. Vol. 5, No. 4, 2017, pp. 151-158.
Muigai, R. G. (2016). Effect of capital structure on financial distress of non-financial companies listed in Nairobi Securities Exchange (Doctoral dissertation, COHRED, Finance, JKUAT).
Muigai, R. G., & Muriithi, J. G. (2017). The moderating effect of firm size on the relationship between capital structure and financial distress of non-financial companies listed in Kenya. Journal of finance and accounting, 5(4), 151-158.
Munene, I. (2019). Kenyan universities: On the brink of financial insolvency. International Higher Education, (97), 25-27.
Myers, J. L., Well, A. D., & Lorch Jr, R. F. (2013). Research design and statistical analysis. Routledge.
Ngwa, L. N. (2016). Impact of Financial Distress on UK Bank Performance and Customer Loyalty: An Empirical Study. University of Wales Trinity Saint David (United Kingdom).
Niresh, A., & Thirunavukkarasu, V. (2014). Firm size and profitability: A study of listed manufacturing firms in Sri Lanka. International journal of business and management, 9(4).
Nketiah, E. T. (2017). Analyzing Investment Decisions Using Altman's Model to Predict Organizational Financial Distress (Doctoral dissertation, Capella University).
Norton, E., Maciejewski,M., & Dowd.B, (2019). Marginal effects-Qualifying the effect of changes in Risk factors in logistic regression models. The Journal of American Association 321(13).
Ntoiti, Gakure and Waititu (2016), contribution of government regulations to financial distress facing local authorities in Kenya, American Journal of Finance, Vol 1 No. 3 (2016)
Nyamboga, T. O., Omwario, B. N., Muriuki, A. M., & Gongera, G. (2014). Determinants of corporate financial distress: case of non-financial firms listed in the Nairobi securities exchange. Research Journal of Finance and Accounting, 5(12), 193-207.
Octavia, E., Abdu, M., & Ginting, A. F. (2021). The Effect of Liquidity and Leverage on Financial Distress (Study on IDX Food and Beverage Sub-Sector Manufacturing Companies for the 2015-2020 Period). Review of International Geographical Education Online, 11(6).
Oktasari, D. P. (2020). The effect of liquidity, leverage and firm size on financial distress. East African Scholars Multidisciplinary Bulletin, 3(9), 293-297.
Olalere, O. A., Temitope, A. K., John, O. O., & Oluwatobi, A. (2015). Evaluation of the impact of security threats on operational efficiency of the Nigerian Port Authority (NPA). Industrial Engineering and Management, 4(4), 1-6.
Omagwa, J. O. (2014). Demographics, housing search, asymetric information and housing decisions amongst apartment households in Nairobi County, Kenya (Doctoral dissertation, University of Nairobi).
Onchangwa, G. A. (2019). Effects of working capital management on financial distress of non-financial firms listed at the Nairobi securities exchange market (Doctoral dissertation, JKUAT-COHRED).
Onyango, S. O. (2016). Effects of Government Bailout on Financial Performance of Commercial State Owned Enterprises In Kenya (Doctoral dissertation, University Of Nairobi).
Opler & Titman (1994), Financial Distress and Corporate Performance, Journal of American Finance Association.
Otuki, Odhiambo & Kisia (2019), ministries face crisis over Kenya shillings 178 billion pending bills, Business Daily, 2019.
Pálinkó, É., & Svoób, Á. (2016). Main causes and process of financial distress. Public Finance Quarterly, 61(4), 516.
Pardeshi, B. (2022). Logistic Regression Analysis for Prediction of Financial Failure: Evidence from Central Public Sector Enterprises in India. Vision, 09722629221135241.
Paul Asquith, Robert Gertner and David Scharfstein (1994), Anatomy of Financial Distress: An Examination of Junk-Bond Issuers, The Quarterly Journal of Economics, 1994, vol. 109, issue 3, 625-658
Platt, H. D., & Platt, M. B. (2008). Financial distress comparison across three global regions. Journal of Risk and Financial Management, 1(1), 129-162.
Prasetyanto, d., probohudono, a. n., chayati, n., & endiramurti, s. r. (2021). analysis of financial distress in indonesia state-owned enterprise. international journal of economics, business and accounting research (ijebar), 5(3).
Rahman, S. U., & Ali, J. (2018). investigating the effect of financial distress on investment efficiency of the companies listed on pakistan stock exchange. Journal of Management Research (JMR), 4(1).
Restianti, T., & Agustina, L. (2018). The effect of financial ratios on financial distress conditions in sub industrial sector company. Accounting Analysis Journal, 7(1), 25-33.
Rezende, F. F., Montezano, R. M. D. S., Oliveira, F. N. D., & Lameira, V. D. J. (2017). Predicting financial distress in publicly-traded companies. Revista Contabilidade & Finanças, 28, 390-406.
Rezende, F. F., Montezano, R. M. D. S., Oliveira, F. N. D., & Lameira, V. D. J. (2017). Predicting financial distress in publicly-traded companies. Revista Contabilidade & Finanças, 28, 390-406.
Saputri, L., & Asrori, A. (2019). The effect of leverage, liquidity and profitability on financial distress with the effectiveness of the audit committee as a moderating variable. Accounting Analysis Journal, 8(1), 38-44.
Saunders, M., Lewis, P., & Thornhill, A. (2016). Research methods for business students (Seventh). Nueva York: Pearson Education.
Sautner & Vladimirov (2018), Indirect Costs of Financial Distress and Bankruptcy Law: Evidence from Trade Credit and Sales
Sayidah, N., & Assagaf, A. (2020). Assessing variables affecting the financial distress of state-owned enterprises in Indonesia (empirical study in non-financial sector). Business: Theory and Practice, 21(2), 545-554.
Seaman, S. R., & White, I. R. (2013). Review of inverse probability weighting for dealing with missing data. Statistical methods in medical research, 22(3), 278-295.
Sehgal, S., Mishra, R. K., Deisting, F., & Vashisht, R. (2021). On the determinants and prediction of corporate financial distress in India. Managerial Finance.
Shaked, I., & Altman, E. (2016). Warning signs of financial distress. American Bankruptcy Institute Journal, 35(11), 28.
Stock, J. H., & Watson, M. W. (2008). Heteroskedasticity‐robust standard errors for fixed effects panel data regression. Econometrica, 76(1), 155-174.
Suhaila, A. M. (2014). The effect of liquidity and leverage on financial performance of commercial state corporation sin the tourism industry in Kenya (Doctoral dissertation, University of Nairobi).
Tinoco, M. H., & Wilson, N. (2013). Financial distress and bankruptcy prediction among listed companies using accounting, market and macroeconomic variables. International Review of Financial Analysis, 30, 394-419.
Tuda, R. A. (2016). Application of multiple discriminant analysis in predicting financial distress of commercial and manufacturing state corporations in Kenya (Doctoral dissertation, University of Nairobi).
Ufo, A. (2015). Impact of financial distress on the leverage of selected manufacturing firms of Ethiopia. Industrial engineering letters, 5(10), 6-11.
Uyanto, S. S. (2019). Monte Carlo power comparison of seven most commonly used heteroscedasticity tests. Communications in Statistics-Simulation and Computation, 1-18.
Wangige, G. J. (2016). Effect of firm characteristics on financial distress of non-financial firms listed at Nairobi securities exchange, Kenya. Unpublished MBA Project.
Wangsih, I. C., Yanti, D. R., Yohana, Y., Kalbuana, N., & Cahyadi, C. I. (2021). Influence Of Leverage, Firm Size, And Sales Growth On Financial Distress. International Journal of Economics, Business and Accounting Research (IJEBAR), 5(4).
Wansbeek, T., & Meijer, E. (2007). Comments on: Panel data analysis--advantages and challenges. Test, 16(1), 33.
Wesa, E. W., & Otinga, H. N. (2018). Determinants of financial distress among listed firms at the Nairobi securities exchange. The Strategic Journal of Business & Change Management, 5(4), 1057–1073.
Zeitun, R., & Saleh, A. S. (2015). Dynamic performance, financial leverage and financial crisis: evidence from GCC countries. EuroMed Journal of Business.
How to Cite
Copyright (c) 2023 Peter Njoroge Kibe, Dr. Lucy Wamugo (PhD), Gerald Atheru
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution (CC-BY) 4.0 License that allows others to share the work with an acknowledgment of the work’s authorship and initial publication in this journal.