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

Abstract

Over the years, numerous cases of financial 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, the primary aim of thisstudy isto determine the role of trading activity on the relationship between financial leverage and the likelihood of financial distressamong 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 studyfound a positive and significant effect of financial leverage (β=0.824; p<0.05) on the likelihoodof financial distress.Subsequently, when trading activity was introduced,the findings indicated that trading activitymoderated the relationship between financial leverage and financial distress (β=-1.498; p;< 0.05),hence presence of moderating effects of trading activity on the relationship between financial leverageand financial distress. The findings that trading activity accounted for a significant variance on relationship between financial leverage and the likelihood of financial distresspresents major contributions of this study as they extend feedback theories. This is by centering the influence of trading activityon the empirical testing of feedback theory. This study recommends that firms should have reversion of excess debt to an optimum and initiate trading activityenhancing policies so as to reduce the likelihood of financial distress. Further research should focus on using different samples like private non-listed firms which may provide additional insights and add to the existing understanding of the issues explored in this study