Leverage as Financial Antecedent to Financial Distress among Listed Companies at Nairobi Securities Exchange

Abstract

The purpose of the research was to determine influence of leverage as financial antecedent of financial distress among listed companies at Nairobi Securities Exchange, Kenya. Capital Markets Authority (CMA) has regulatory responsibility to keep watch on the performance of listed companies in the securities exchange and to attract more listings.  The crisis in the listed companies where more than 16 companies listed in the Nairobi Securities Exchange are undergoing financial challenges in the last 5 years is a worrying trend as it impacts negatively in the growth of the economy. This crisis points to the missing link between surveillance by regulator and management of listed firms. Specifically, the study examined leverage as a possible financial antecedent of financial distress in listed companies at Nairobi Securities Exchange, Kenya. The study used descriptive research design. All the 65 listed companies as at 31^st December 2011 at Nairobi Securities Exchange were used. Secondary data was collected using designed schedules. Data was analyzed using Statistical Package for Social Sciences (SPSS) as tool of data analysis. A logistic regression model was determined to establish the relationship between the dependent variable and the independent variables. Pearson’s correlation and regression analysis were used for the analysis. The study established significant relationship between leverage and financial distress, upon evaluation, relationship had an R2 = .799, which meant leverage explained 79.9% of the variance in financial distress. The relationship model provides a high fit, which indicates that leverage was one of the potential predictors of financial distress in listed companies at Nairobi Securities Exchange, Kenya. It therefore recommends the development of guidelines on the level of leverage to be held by the listed companies for sustainability.

Key words: Leverage, financial distress, financial antecedent, listed companies, Nairobi Securities Exchange.