Effect of Trading Activity on Financial Leverage and Financial Distress Likelihood of Listed Firms in Kenya

Abstract

Over the years, numerous cases of f inancial distress have been witnessed among listed firms in Nairobi Securities Exchange. Trading activity affects corporate financial decisions by reducing cost of capital and facilitating access to more funds on the capital markets. Consequently, trading activity enhances firm performance due to the feedback effect. In view of the aforementioned, t he primary aim of th is study is to determine the role of trading activity on the relationship between financial leverage and the likelihood of financial distress among listed firms in Kenya. The analysis is based on a sample of 40 listed firms on the Nairobi Securities Exchange - Kenya for the period 2006 - 2015. The study found a positive and significant effect of financial leverage (β=0.824; p<0.05) on the likelihood of financial distress . Subsequently, when trading activity was introduced, the findings indicated that trading activity moderated the relationship between fi nancial leverage and financial distress (β= - 1.4 98; p;< 0.05 ), hence presence of moderating effects of trading activity on the relationship between financial leverage and financial distress. The findings that trading activity accounted for a significant var iance on relationship between financial leverage and the likelihood of financial distress presents major contributions of this study as they extend feedback theories. This is by centering the influence of trading activity on the empirical testing of feedba ck theory. This study recommends that firms should have reversion of excess debt to an optimum and initiate trading activity enhancing policies so as to reduce the likelihood of financial distress. Further research should focus on using different samples l ike private non - listed firms which may provide additional insights and add to the existing understanding of the issues explored in this study