WORKING CAPITAL MANAGEMENT AND FINANCIAL DISTRESS OF NON-FINANCIAL COMPANIES LISTED AT THE NAIROBI SECURITIES EXCHANGE

Robert Gitau Muigai, Tabitha Nasieku

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 study therefore set out to examine the way in which management of working capital affects financial distress of non-financial firms listed at the Nairobi Securities exchange. In fulfilling this objective, the study sought to establish how cash management, inventory management and accounts receivables management effects 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 basis of the study. The study adopted longitudinal research design and collected secondary data over ten years period (2009-2018) from a census of the 40 non-financial firms listed in Nairobi Securities exchange. Descriptive statistical analysis was used to obtain the initial overview of the data collected. Inferential statistical analysis was undertaken using the F and t-tests at 95% confidence level. The study found that cash management had a positive and significant effect on the firms’ distress index. Further, the study revealed that inventory holding period was negatively and significantly related to the firms’ financial distress index. The study also showed that suppliers’ payment period had a positive and significant effect on financial distress indicator. The study however depicted a negative but insignificant relationship between receivables period and financial distress. The study recommended that the management of non-financial listed firms should ensure appropriate management of working capital components in order to guard against instances of corporate financial distress

JEL: O15; J24; L20

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Keywords


working capital, financial distress, cash, inventory, receivables

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References


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DOI: http://dx.doi.org/10.46827/ejefr.v5i1.1073

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