Effect Of Selected Firm Characteristics On Financial Distress Of Large Supermarkets In Nairobi City County, Kenya

Abstract

Supermarkets serve as a vital link between producers and consumers, ensuring the efficient distribution of a wide range of goods and services across the country. Despite the critical importance of the supermarket industry, large supermarket chains in Nairobi City County have been grappling with significant financial stability challenges. The study aimed to determine the effect of selected firm characteristics on financial distress of large supermarkets in Nairobi City County. The specific objectives include; to establish the effect of firm size on financial distress of large supermarkets in Nairobi City County. To determine the effect of leverage on financial distress of large supermarkets in Nairobi City County. To examine the effect of liquidity on financial distress of large supermarkets in Nairobi City County. The study was informed by three theories that include; signaling theory, agency theory and the liquidity preference theory. The study used explanatory research design. The study focused on seven large supermarkets that include Naivas, QuickMart, Cleanshelf, Eastmatt, Carrefour, Mathai Supermarket and Chandarana Foodplus financial records for a period of 7 years (2017-2023) were obtained from the websites of the seven supermarkets and their annual reports, which are maintained by the Retail Trade Association of Kenya (RETRAK). The study collected secondary panel data from 2017-2023 for 7 large supermarkets in Nairobi using a data collection checklist. It analyzed the data using descriptive statistics and panel regression to examine the effects of firm size, leverage, and liquidity on financial distress. Diagnostic tests like multicollinearity, normality, heteroscedasticity, stationarity, autocorrelation, and Hausman test were conducted. The findings were presented using tables and discussed in light of existing literature, highlighting implications for theory and practice. The study found that firm size had a moderate negative correlation (r=-0.440, p=0.002) with financial distress. The panel regression analysis also found that firm size had a significant negative effect (β=-1.3214, p=0.015) on financial distress of large supermarkets in Nairobi City County. The study also found that leverage had a moderate positive correlation (r=0.377, p=0.008) with financial distress. The panel regression results further showed that leverage had a significant positive effect (β=0.6206, p=0.035) on financial distress of large supermarkets. The study also found that liquidity had a strong negative correlation (r=-0.512, p=0.000) with financial distress. The panel regression analysis additionally revealed that liquidity had a significant negative effect (β=-2.7411, p=0.000) on financial distress of large supermarkets in Nairobi City County. The study concluded that firm size has a negative and significant effect on financial distress among large supermarkets in Nairobi City County, implying that larger supermarkets are less likely to experience financial distress. Leverage was found to have a positive and significant effect on financial distress, suggesting that highly leveraged supermarkets are more susceptible to financial challenges. Liquidity was shown to have a negative and significant effect on financial distress, indicating that supermarkets with strong liquidity positions are better equipped to handle unexpected financial hurdles. These study shows the crucial role of effective financial management in promoting the stability and long-term sustainability of the supermarket sector in Nairobi City County.