Strategic conformity, stock liquidity and financial distress among listed firms in Nairobi Securities Exchange, Kenya.

Abstract

Over the years, numerous cases of financial distress have been witnessed among listed firms in Nairobi Securities Exchange. This has been evidenced by companies facing defaulted financial obligations, assets shrinking, financial restructuring and others being placed under receivership and subsequently delisted. Consequently, a method of determining corporate financial distress is clearly a matter of considerable interest to investors, creditors, employees and other stakeholders. Although studies have been done on predicting financial distress of firms, the aspect of strategic conformity and the role of stock liquidity have received little attention in empirical investigations of financial distress. In view of the aforementioned, the objective of the study was to determine the relationship between strategic conformity dimensions and prediction of financial distress of firms and how stock liquidity moderates the relationship between strategic conformity dimensions and financial distress prediction among listed firms in Kenya. This study was informed by trade-off theory, agency theory, institutional and feedback theory. The study adopted positivism research philosophy and explanatory research design. The study employed panel analysis for a period covering ten years from 2006-2015. The target population comprised all 62 listed firms in Nairobi Securities Exchange. The sample size was 40 firms which were listed for the entire period of study and had complete data. Secondary firm-level panel data was gathered from year-end financial reports for the period 2006-2015. Data was analyzed using both descriptive and inferential statistics. Specifically, Pearson’s correlation coefficient, standard multiple regression analysis and hierarchical moderated multiple regression analysis were used to analyze and test the hypotheses. The study found a positive and significant effect of non production overhead (β=0.914; p<0.05), financial leverage (β=0.824; p<0.05) and inventory levels (β =0.678; p<0.05) on the prediction of financial distress while plant and equipment newness had a negative and significant effect on the prediction of financial distress (β=-0.580; p<0.05). Subsequently, when the independent variables were moderated with stock liquidity the findings indicated that stock liquidity moderated the relationship between non-production overhead and financial distress (β=-1.979; p<.05), financial leverage and financial distress (β=-1.998; p; < 0.05), inventory levels and financial distress (β=-1.890; p < 0.05) and plant and equipment newness and financial distress (β=-2.376; p<0.05), hence presence of moderating effects of stock liquidity on the relationship between strategic conformity and financial distress. The findings that non production overhead, inventory levels and plant and equipment newness accounted for a significant variance on the prediction of financial distress and that stock liquidity significantly moderates the relationship between strategic conformity and financial distress presents major contributions of this study as they extend both institutional and feedback theories. This is by centering strategic conformity on the empirical testing of institutional theory as well as the influence of stock liquidity on the empirical testing of feedback theory. This study recommends that firms should have control on their non production overheads, have reversion of excess debt to an optimum, establish inventory reduction policies, invest in plant and equipment and initiate stock liquidity enhancing 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.