Impact of financial distress on the market value of listed companies in Kenya
Date
2022
Authors
Mwaniki, Martin Mwangi
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
The proposal by the CMA to establish a recovery board to assist in the recovery of technically insolvent companies points to a problem amongst listed firms at the NSE. Transparency on the financial health status of companies would be critical to all stakeholders of listed companies. This study aimed at assessing the financial health status of listed firms at the NSE and its impact on the market value of companies. The study applied accounting-based financial distress prediction models to measure the financial health of listed companies for a period of 5 years between 2016 and 2020. The study focused on the detection of financial distress per sector, establishing the relationship between financial distress and the market value of a company, and the perspective of market players on financial distress. The research adopted a positivist philosophy and applied a descriptive research design. The study was both qualitative and quantitative in nature and relied on primary data collected from market players as well as secondary data collected from the audited annual financial reports, the NSE investor handbook, and the CMA bulletin found on the websites of the respective organizations. The financial distress Scores were calculated using Excel and IBM SPSS was applied in regression analysis to determine the relationship between the variables. The study established that there was an increasing trend in the number of companies in financial distress as measured by the Altman Z-score, Zmijewski, and Springate Models. In addition, the study established that financial distress is much more than having liabilities exceed the assets of a company. Further, the study established a significant relationship between financial distress and market capitalization as measured by Springate (p =0.000) and Zmijewski Model (p =0.001) and an insignificant relationship as measured by the Altman Z-score model (p =0.287). The study recommends the establishment of a recovery board for the rehabilitation of companies under financial distress. Further, the study recommends the adoption of the Springate model in predicting the variation of market capitalization.
Description
A Thesis Submitted in Partial Fulfilment of the Requirements for the Award of a Master of Commerce Degree in Finance of Strathmore Business School