Effect of Default on Profitability in Kenyan Listed Companies


solvency; liquidity; firm size; profitability

How to Cite

Ndegwa, J. (2020). Effect of Default on Profitability in Kenyan Listed Companies. International Journal of Finance & Banking Studies (2147-4486), 9(4), 01-10. https://doi.org/10.20525/ijfbs.v9i4.876


The study investigated the whether the default measures of liquidity and solvency are associated and whether default measures are related to firm profitability. 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. 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.



Adedeji, A. (1998). Does the Pecking Order Hypothesis Explain the Dividend Payout Ratios of Firms in the UK. Journal of Business Finance and Accounting, 25, pp127-157, https://doi.org/10.1111/1468-5957.00230

Al Matari, E. M., Al Swidi, A. K., and Bt Fadzil, F. H. (2014). The Measurements of Firm Performance’s Dimensions. Asian Journal of Finance & Accounting, 6(1), 24-49, https://doi.org/10.5296/ajfa.v6i1.4761

Brunnermeier, Markus K.; Pedersen, Lasse Heje (2009). Market Liquidity and Funding Liquidity. Review of Financial Studies. 22 (6): 2201–38. CiteSeerX https://doi:10.1093/rfs/hhn098. S2CID 9093699

Bryman, A. (2012). Social Research Methods 4th Edition. Oxford University Press Inc., New York. Retrieved from: https://www.academia.edu/38228560/Alan_Bryman-Social_Research_Methods_4th_Edition-Oxford_University_Press_2012_.pdf

Dalci, I., Tanova C., Ozyapici, H., and Bein, M., A. (2019). The Moderating Impact of Firm Size on the Relationship between Working Capital Management and Profitability. Prague Economic Papers, 1-17, https://doi.org/10.18267/j.pep.681

Ergun U. and Gosku A. (2013) Applied Econometrics with E-views Applications. IBU Publications, Sarajevo. Retrieved from: https://www.macmillanihe.com/page/detail/Applied-Econometrics/?K=9781137415462

Financial Sector Deepening Kenya (2019). The 2018 Annual Report. Nairobi Kenya, FSD Kenya, 6-8. Retrieved from: https://fsdkenya.org/publication/2018-annual-report/

Frank, J. (2003). Financial Accounting for Local and State School Systems, Chapter 5 Financial Reporting, 2003 Edition, National Center for Education Statistics, 41-89. Retrieved from: https://nces.ed.gov/pubs2004/2004318.pdf

Freeman, R., Andrew, C. and Parmar, B. (2004). Stakeholder Theory and the Corporate Objective Revisited. Organization Science, 15(3), 364–369, https://doi.org/10.1287/orsc.1040.0066

Hagel, J., Brown, S T., Samoylova, T., and Lui, M. (2013). Success or struggle: ROA as a True Measure of Business Performance, Report 3 of the 2013 Shift Index series. Deloitte Center for the Edge, Deloitte University Press, 1-22. Retrieved from: www2.deloitte.com › insights › topics › operations › su...

Hair, J.F., Anderson R.E., Babin B.J. and Black W.C. (2014). Multivariate Statistics and Econometrics. Pearsons Education, Essex, UK. Retrieved from: www.amazon.co.uk › Multivariate-Analysis-Seventh-Bl...

Hamid, W and Rohani, M. (2018). Predicting Financial Distress: Importance of Accounting and Firm Specific Market Variables for Pakistan’s Listed Firms. Cogent Economics & Finance, 1-16, https://doi.org/10.1080/23322039.2018.1545739

Heejung, Y. (2016). Solvency and Liquidity in Shipping Companies. The Asian Journal of Shipping and Logistics, 32(4), 235-241, https://doi.org/10.1016/j.ajsl.2016.12.007

Jasay, A. (2008). Solvency and Liquidity: Some Financial "Crises" Are More Critical Than Others, The Library of Economics and Liberty. https://www.econlib.org/library/Columns/y2008/Jasaysolvency.html

Keynes J. (1936). The General Theory of Employment, Interest and Money. Palgrave Macmillann, UK. Retrieved from: http://www.hetwebsite.net/het/texts/keynes/gt/gtcont.htm

Khidmat, W and Rehman, M. (2014). Impact of Liquidity and Solvency on Profitability Chemical Sector of Pakistan. Journal of Ekonomica, Management and Innovace, 6(3), 3-13, https://doi.org/10.6007/IJARAFMS/v6-i1/1954

Kundid, A., N. and Marinovic, A. (2016). Solvency and Liquidity Level Trade-off: Does it Exist in Croatian Banking Sector? Scientific Annals of Economics and Business. 63(3), 429-440. Retrieved from: https://www.researchgate.net/publication/311794535_Solvency_and_Liquidity_Level_Trade-off_Does_it_Exist_in_Croatian_Banking_Sector

Kyule, J M. (2015). Impact of liquidity and solvency on financial performance of companies listed in the Nairobi Securities Exchange. Unpublished MBA thesis. University of Nairobi, Nairobi, Kenya

Liem, P and Sautma, R. (2012). Price Earnings Ratio and Stock Return Analysis (Evidence from Liquidity 45 Stocks Listed in Indonesia Stock Exchange). Jurnal Manajemen Dan Kewirausahaan, 14(1), 7-12, https://doi.org/10.9744/jmk.14.1.7-12

Mburu, R. M. (2015). The Effect of Liquidity and Solvency on the Profitability of Commercial Banks in Kenya. Unpublished MBA Thesis, University of Nairobi, Nairobi, Kenya. Retrieved from: http://erepository.uonbi.ac.ke/bitstream/handle/11295/94560/Muthoni_The%20Effect%20of%20Liquidity%20and%20Solvency%20on%20the%20Profitability%20of%20Commercial%20Banks%20in%20Kenya.pdf?sequence=3

Modigiliani, F., and Miller, M. (1963). Corporate Income Taxes and the Cost of Capital: A Correction. The American Economic Review, 433-443. Retrieved from: ://www.scirp.org/(S(i43dyn45teexjx455qlt3d2q))/reference/ReferencesPapers.aspx?ReferenceID=1363843

Mosab, T and Hassan, I H. (2017). Liquidity, Profitability and Solvency of UAE Banks: A Comparative Study of Commercial and Islamic Banks. Academy of Accounting and Financial Studies Journal, 21(2), 1-15. Retrieved from: https://www.researchgate.net/publication/322043462_Liquidity_profitability_and_solvency_of_UAE_Banks_A_comparative_study_of_commercial_and_Islamic_Banks

Moulton H. (1915). Commercial Banking and Capital Formation. Journal of Political Economy, 26(2), 456-667, https://doi.org/10.1086/253113

Mugosa, A. (2015). The determinants of capital structure choice: Evidence from Western Europe. BEH -Business and Economic Horizons, 11(2), 76-95, http://dx.doi.org/10.15208/beh.2015.07

Muthike, S. (2017). Relationship Between Corporate Liquidity Risk and Solvency of Commercial Banks in Kenya. Unpublished MBA Thesis, University of Nairobi, Nairobi, Kenya. Retrieved from: http://erepository.uonbi.ac.ke/bitstream/handle/11295/103312/salome%20final%20project-pdf.pdf?sequence=1

Myers, C., and Majluf, S. (1984). Corporate Financing and Investment Decisions When Firms Have Information that Investors Do Not Have. Journal of Financial Economics, 13(2), 187-221, https://doi.org/10.1016/0304-405X(84)90023-0

Niresh, J A. (2012). Trade-Off between Liquidity & Profitability: A Study of Selected Manufacturing Firms in Sri Lanka. Research World Journal, 3(4), 35-40. DOI: 10.4236/jsemat.2015.52009

Nur and Mohamed (2016), The Study on Relationship Education Background towards Credit Risk Management Knowledge and Awareness among Micro Business in Malaysia. International Journal of Business and Social Science, 7(5), 144-152. Retrieved from: http://www.ijbssnet.com/journals/Vol_7_No_5_May_2016/13.pdf

Olalere, O E., Aminul, I., Mohd, Z., Mat, J., and Wan Sallha, Y. (2019). Loan Growth, Bank Solvency and Firm Value: A Comparative Study of Nigerian and Malaysian Commercial Banks. Journal of Reviews on Global Economics, 8, 373-386. Retrieved from: http://lifescienceglobal.com/pms/index.php/jrge/article/download/6002/3333

Rajan, G., and Zingales, L. (1995). What Do We Know About Capital Structure? Journal of Finance, 50(5), 1421-1460, https://doi.org/10.1111/j.1540-6261.1995.tb05184.

Satwinder, S., Naeem, T., Tamer, K D., and Georgios, B. (2017). Corporate Governance and Tobin's Q as a Measure of Organizational Performance. British Journal of Management, 00, 1-20, https://doi.org/10.1111/1467-8551.12237

Shahar, W S., Bahari, F N., Ahmad, W N., Fisal, S., and Rafdi N J. (2015). A Review Of Capital Structure Theories: Trade-Off Theory, Pecking Order Theory and Market Timing Theory. Proceeding of the 2ndInternational Conference on Management and Muamalah 2015 (2nd ICoMM) 16th–17th, November 2015. Retrieved from : http://www.revec.ro/images/images_site/categorii_articole/pdf_categorie_0ab7053a15063503229ade8a6b1bbd63.pdf

Surbhi, S. (2016). The Difference Between Liquidity and Solvency, Retrieved from: https://keydifferences.com/difference-between-liquidity-and-solvency.html

Troaca, T. (2013). Models for Analyzing the Business Solvency under Economic Crisis Conditions, Journal of Knowledge Management, Economics and Information Technology, pp386-394. Retrieved from: https://ideas.repec.org/a/spp/jkmeit/spi13-27.html

Yamane T. (1967). Statistics: An Introductory Analysis, 2nd Ed., Harper and Row, New York, USA. Retrieved from: https://doi.org/10.12691/ajams-4-6-3.

Yusoff, H., B. (2017). Effect of Liquidity and Solvency on Profitability in Public Listed Consumer Product Companies in Malaysia. Unpublished MBA thesis, University Tun Hussein Onn, Malaysia. Retrieved from: http://eprints.uthm.edu.my/id/eprint/9865/

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.