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