The Moderating Effect of the Listing Sector on the Relationship Between Capital Structure and Financial Distress of Non-Financial Companies Listed in Kenya

Abstract

This paper sought to investigate the moderating effect of the listing sector on the relationship between capital structure and financial distress of listed non-financial firms in Kenya. In total, non-financial firms are listed across seven sectors depending on their primary commercial activity. Capital structure was operationalized by total debt, long-term debt and short term debt financing. The degree of financial distress was measured using the Altman’s Z-score index as reviewed for the emerging markets. Secondary data from audited and published financial statements was collected for the 40 listed non-financial firms for 10 years between 2007 and 2016. The study estimated the specified panel regression model for fixed effects as supported by the Hausman test results. Feasible Generalized Least Squares (FGLS) regression results revealed that the listing sector has a significant moderating effect on the relationship between capital structure and financial distress of non-financial firms. On the basis of these empirical findings, the study recommended that managers of listed non-financial companies should always consider the sector-specific factors in making leverage choice decisions for their entities.

Keywords: Capital Structure, Financial Distress, Listing sector