orking Capital Management and Financial Distress of Non-Financial Companies Listed in Nairobi Securities Exchange

Abstract

Financial distress is a common global phenomenon among the corporate entities. Locally, there is overwhelming evidence of firms that have undertaken financial restructuring, delisted from the exchange market, gone into receivership and subsequently liquidated on account of financial distress. This unfavorable situation not only contributes to loss of investor’s wealth but also erodes their confidence in the stock market. Available literature associates financial distress with corporate capital structure; which result from the long-term financing activities. However, capital structure decisions are notably few and far between within a corporation’s operating cycle. This is in stark contrast to working capital decisions that are made on a daily basis. In the light of this factor, it is probable that suboptimal working capital decisions could trigger corporate financial distress. This study therefore set out to examine the way in which administration of working capital affects financial distress of non-financial firms listed at the Nairobi Securities exchange. Unlike the previous studies that have largely examined the effect of long-term financing on financial distress, this study set out to determine how short-term financing affects financial distress among non-financial firms. Further, this study aimed at linking working capital management decisions to financial distress; unlike preceding studies that generally focused on corporate profitability. In fulfilling this objective, the study sought to establish the effects of: Cash management, inventory management, accounts receivables management and accounts payable management on financial distress of non-financial firms listed at Nairobi Securities Exchange. The free cash flows theory, Precautionary motive theory, financing advantage theory and liquidity theory formed the theoretical foundation of the study. The study adopted longitudinal research design; which involved collecting data on the relevant variables from a census of the 40 listed non-financial companies for 10-year period covering 2009 – 2018 (both years inclusive). The study relied on secondary panel- form data obtained from audited financial statements of the non-financial firms over the listing duration. Descriptive statistical analysis was used to obtain the initial overview of the data collected. Panel regression analysis was undertaken using the F and t-tests at 95% confidence level. Results showed that liquidity level had a positive and significant effect on the firms’ distress index that inventory holding period was negatively and significantly related to the firms’ financial distress index and that suppliers’ payment period had a positive and significant effect on financial distress indicator. There was a negative but insignificant relationship between receivables period and financial distress. We recommend that management of non-financial listed firms should ensure appropriate management of working capital components in order to mitigate their effects on financial distress.