Effect of Default on Profitability in Kenyan Listed Companies

Abstract

Past studies in Kenya on default have concentrated on liquidity as a measure of short term default and neglected solvency which measures long term default. The current study examined the association between solvency and liquidity and their effect on profitability in Kenyan listed companies. A total of 41 firms were selected to be in the study sample out of 46 non-financial listed firms in the Nairobi Securities Exchange during years 2013 to 2017 and panel data regression analysis was employed hence 205 firm years were analyzed. The findings revealed that liquidity and solvency are significantly and negatively associated while the default measures lacked a significant relationship with profitability in Kenyan listed companies. The findings implied that there is no need for firms to focus too much on the relationship between default and profitability including invest heavily in liquidity in order to meet short term obligations as nowadays it is possible for firms to either convert non-cash assets quickly or borrow on short notice from financial institutions in case of an urgent need to meet liquidity shortages. These findings are consistent with the shitability theory.