Validity of the multiple discriminate analysis failure prediction model on corporate financial distress: An analysis of the Kenyan market
Date
2021
Authors
Lagat, Nicole Jerop
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
The core objective of the study was to test the applicability of the multiple discriminate analysis
model in predicting corporate failure of financially distressed companies in different industries in
Kenya based on a 3 part criteria. These companies should have been listed in the Nairobi Securities
Exchange as listed companies greatly affect investment and the economy as a whole. Second, the
companies should have previously experienced financial distress to the point that it was on the
verge of failure. Finally, the companies should have sought assistance from the I,<.enyan
Government as a final resort before complete failure. Thus the author was able to pick out 4
companies out of the 62 listed. This will assist various stakeholders in the Kenyan financial
industry to react to corporate distress signals early enough to avoid financial failure. Descriptive
analysis research design was adopted in this study which was carried out on a total of21 companies
classified as either distressed or non-distressed to allow for proper discrimination. The period of
study was 20 years ranging from 2000-2019. The audited financial accounts of the chosen
companies provided secondary financial data. This data was used to extract liquidity, profitability,
efficiency, activity and leverage ratios which were then summed up to anive at the Z-Score. Data
analysis was conducted through the use of MS Excel where correlation and regression tests were
tabulated. The research findings indicate that the MDA model both for manufacturing(l968) and
of non-manufacturing(2006) are reliable in predicting financial distress of companies in Kenya as
it predicted accurately 71% of non-distressed corporations and 64% of distressed firms.
Furthermore, the findings provide evidence that liquidity (WC/T A), profitability (RE/T A),
Efficiency(EBIT/TA) and leverage (MVE/TL) ratios had a major influence on financial distress
prediction. However, the activity ratio (Sales/TA) did not have much influence. The outcome of
this study suggests that stakeholders in a firm can predict failure before it occurs by paying close
attention to liquidity, profitability, efficiency and leverage ratios. This will enable them avoid the
losses associated with failures by taking appropriate actions in advance.
Description
Submitted in partial fulfillment of the requirements for the Degree of Bachelor of Science in Financial Economics at Strathmore University