An Assessment Of The Effect Of Financial Distress On Financial Performance Of Manufacturing Firms Listed In Nairobi Securities Exchange

Abstract

Financial distress has been on the rise all over the world and more rampant in Africa continent. Financial distress leads to firms being bankrupt and finally collapse. This problem has been increasing and it has to be curbed since manufacturing firms contribute to the growth of the economy. The essense of this study was to assess the effects of financial distress on the financial performance of manufacturing firms listed in Nairobi security exchange. The study specific objective were; to determine the effect of liquidity on financial performance of listed manufacturing firms, to establish the effect of solvency on financial performance of listed manufacturing firms and to analyse the effect of financial health on financial performance of the listed manufacturing firms. The study used credit risk theory, pecking order theory of financing,Gambler‟s Ruin Theory and shiftability theory. Descriptive research design was used and census approach method was used in the study where all eleven companies were selected without sampling. The sample size included all the nine active listed manufacturing companies at the NSE. Data for all the variables in the study was extracted from audited published reports and financial statements of the listed manufacturing firms in the NSE covering the years 2011 to 2015 where quarterly reports were used. Data collected was analysed using SPSS version 22 and microsoft excel spread sheet. Descriptive statistic such as mean, average, weighted mean and standard deviation was also used in analysing the data. The Return on Assets and Return on Equity ratios were used to measure the firm‟s financial performance with the formulation of multiple regression analysis to establish the effect of financial distress on financial performance of listed manufacturing companies on the NSE. The study established AR 2 of 0.983 which implied that 98.3% of the changes in financial performance (ROA) of the firms listed at NSE was attributed to the changes in independent variables considered in the model while for ROE the findings indicated that AR2 was .885 which implied that ROE explained 88.5% of performance in the SACCOs. The findings showed that liquidity negatively impacts on the ROA of the firms listed at NSE. The effect of liquidity on ROA and ROE is not statistically significant at 5% level of significance. Solvency negatively affects ROA and ROE of firms listed at NSE. Financial health was found to positively influence ROA and ROE though the effect is not statistically significant.