Corporate Risk, Firm Size and Financial Distress: Evidence from Non-Financial Firms Listed In Kenya

Abstract

Financial distress (FD)is a common precursor to corporate failure that subjects investors to financial loss. In Kenya, FD has been rampant among several private and public commercial entities. This signifies presence of deep-seated corporate snags that hamper sustainability. Earlier studies have focused more on FDmodeling while others provide conflicting findings pertaining to risk exposure andfinancial health.This study therefore examines the influence of corporate riskon FD. Additionally, the moderation effect of firm sizeon the relationship between corporate riskand FD was tested. This study is premised on Modigliani and Miller’s first proposition and signaling theory.Aquantitative research design with a correlational approachwas adopted targeting all non-financial firms listed in Nairobi Securities Exchange (NSE)from year 2006 to 2015. The study collected secondary data from audited financial statements, daily stock prices and stock market indices. Data analysis involved hierarchical panel regression analysis. The results show that corporate risk significantly and positively influences FD. Unsystematic risk in terms of business and financial risk has a positive significant influence on FD in contrast to systematic risk proxied bymarket risk that has an insignificant positive effect. Interaction terms; corporate risk*firm size and unsystematic risk*firm size have a positive insignificant effect on FD while interaction term market risk*firm sizerelates negatively and insignificantly with FD.Large firms can accommodate more market risk without experiencing FD as opposed to unsystematic riskthat is more disastrous.This study recommends continuous proactive risk management practices that go beyond mere risk assessment so as to integrate risk exposures and incidentsmore so those that are internal