Do Firm Size and Leverage Determine Distance to Corporate Bankruptcy? Evidence from Listed Firms in Kenya

  • John K. Tarus Moi University, Kenya
Keywords: Firm Size, Leverage, Corporate Bankruptcy, Firm Age



Over the past decades, corporate bankruptcy has been a major problem both in developed and emerging economies. This is evident by the statistics of corporate bankruptcy rising from year to year. This study aims to investigate the determinants of distance to corporate bankruptcy among listed firms in Kenya. The study was guided by the trade-off theory, normative theory, and explanatory research design was adopted. The target population consisted of 45 listed companies that have continually operated on the Nairobi Securities Exchange for 6 years from 2015 to 2020. The study findings showed that firm size had a positive and significant effect on the distance to corporate bankruptcy (β= 0.281, p<0.05), while leverage had a negative and significant effect on the distance to corporate bankruptcy (β= -0.321, p- <0.05). The study concludes that an increase in firm size leads to corporate bankruptcy, while leverage reduces the distance to corporate bankruptcy. Thus, it would be prudent for firms experiencing a downturn to reduce the scope of their operational output rather than seek financial aid from financial institutions since it can result in bankruptcy. While firms should ensure that debt borrowed realizes a higher return to stockholders so that they can earn more on their assets than the cost of the money used to finance these debts.


Agarwal, V., & Taffler, R. (2008). Does financial distress risk drive the momentum anomaly? Financial Management, 37(3), 461-484.

Agarwal, V., & Taffler, R. J. (2007). Twenty‐five years of the Taffler z‐score model: Does it really have predictive ability? Accounting and Business Research, 37(4), 285-300.

Allen, F., Babus, A., & Carletti, E. (2009). Financial crises: theory and evidence. Annu. Rev. Financ. Econ., 1(1), 97-116.

Altman, E. I. (1984). A further empirical investigation of the bankruptcy cost question. The Journal of Finance, 39(4), 1067-1089.

Avramov, D., Chordia, T., Jostova, G., & Philipov, A. (2009). Credit ratings and the cross-section of stock returns. Journal of Financial Markets, 12(3), 469-499.

Azash S. Ramakrishnaiah K.and. VenkataRamana N. 2012. Financial Performance and Predicting the Risk of Bankruptcy: A Case of Selected Cement Companies in India International journal of public administration and management research Vol. 1, no. 1

Baimwera, B., & Muriuki, A. M. (2014). Analysis of corporate financial distress determinants: A survey of non-financial firms listed in the NSE. International Journal of Current Business and Social Sciences, 1(2), 58-80.

Begley, J., Ming, J., & Watts, S. (1996). Bankruptcy classification errors in the 1980s: An empirical analysis of Altman's and Ohlson's models. Review of Accounting Studies, 1(4), 267-284.

Berkovitch, E., & Israel, R. (1999). Optimal bankruptcy laws across different economic systems. The Review of Financial Studies, 12(2), 347-377.

Berlin, M., John, K., & Saunders, A. (1996). Bank equity stakes in borrowing firms and financial distress. The Review of Financial Studies, 9(3), 889-919.

Campbell, J. Y., Hilscher, J., & Szilagyi, J. (2008). In search of distress risk. The Journal of Finance, 63(6), 2899-2939.

Central Bank of Kenya, (CBK) (2006). Bank Supervision report; Kenyan banking Sector for the period ended December 2006.

Chava, S., & Jarrow, R. A. (2004). Bankruptcy prediction with industry effects. Review of Finance, 8(4), 537-569.

De Vaus, D. (2001). Research design in social research. Sage.

De Vaus, D. (2016). Survey research. Research methods for postgraduates, 202-213.

Dichev, I. D. (1998). Is the risk of bankruptcy a systematic risk? Journal of Finance, 53(3), 1131-1147.

Dirman, A. (2020). Financial Distress: The Impacts of Profitability, Liquidity, Leverage, Firm Size, and Free Cash Flow. International Journal of Business, Economics, and Law, 22(1), 17-25.

Dyrberg, A. (2004). Firms in financial distress: An exploratory analysis (No. 17). Danmarks National Bank Working Papers.

Ettredge, M., Johnstone, K., Stone, M., & Wang, Q. (2011). The effects of firm size, corporate governance quality, and bad news on disclosure compliance. Review of Accounting Studies, 16(4), 866-889.

Fama, E. F. (1980). Agency problems and the theory of the firm. Journal of Political Economy, 88(2), 288-307.

Fitzpatrick, J., & Ogden, J. P. (2011). The detection and dynamics of financial distress. International Review of Finance, 11(1), 87-121.

Franks, J., & Sussman, O. (2005). Financial distress and bank restructuring of small to medium size UK companies. Review of Finance, 9(1), 65-96.

French, K., Baily, M., Campbell, J., Cochrane, J., Diamond, D., Duffie, D., & Shiller, R. (2010). The Squam Lake report: fixing the financial system. Journal of Applied Corporate Finance, 22(3), 8-21.

Garlappi, L., Shu, T., & Yan, H. (2008). Default risk, shareholder advantage, and stock returns. The Review of Financial Studies, 21(6), 2743-2778.

Gill, A., Biger, N., Pai, C., & Bhutani, S. (2009). The determinants of capital structure in the service industry: Evidence from United States. The Open Business Journal, 2(1), 48-53.

Haugen, R. A., & Senbet, L. W. (1978). The insignificance of bankruptcy costs to the theory of optimal capital structure. The Journal of Finance, 33(2), 383-393.

Henry, D. (2008). Corporate governance structure and the valuation of Australian firms: is there value in ticking the boxes? Journal of Business Finance & Accounting, 35(7‐8), 912-942.

Hillman, A. J., Keim, G. D., & Luce, R. A. (2001). Board composition and stakeholder performance: Do stakeholder directors make a difference? Business & Society, 40(3), 295-314.

Hong, H., Torous, W., & Valkanov, R. (2007). Do industries lead stock markets? Journal of Financial Economics, 83(2), 367-396.

Ikpesu, F. (2019). Firm-specific determinants of financial distress: Empirical evidence from Nigeria. Journal of Accounting and Taxation, 11(3), 49-56.

Jahur, M. S., & Quadir, S. N. (2012). Financial distress in small and medium enterprises (SMEs) of Bangladesh: Determinants and remedial measures. Economia. Seria Management, 15(1), 46-61.

Kliestik, T., Misankova, M., Valaskova, K., & Svabova, L. (2018). Bankruptcy prevention: new effort to reflect on legal and social changes. Science and Engineering Ethics, 24(2), 791-803.

Kumar, R. (2019). Research methodology: A step-by-step guide for beginners. Sage Publications Limited.

Lifschutz, S., & Jacobi, A. (2010). Predicting bankruptcy: evidence from Israel. International Journal of Business and Management, 5(4), 133.

Lin, C., Schmid, T., & Xuan, Y. (2018). Employee representation and financial leverage. Journal of Financial Economics, 127(2), 303-324.

Lucky, L. A., & Michael, A. O. (2019). Leverage and corporate financial distress in Nigeria: A panel data analysis. Asian Finance & Banking Review, 3(2), 26-38.

Madrid-Guijarro, A., García-Pérez-de-Lema, D., & Van Auken, H. (2011). An analysis of non-financial factors associated with financial distress. Entrepreneurship and Regional Development, 23(3-4), 159-186.

McKee, T. E. (2007). Altman's 1968 bankruptcy prediction model revisited via genetic programming: new wine from an old bottle or a better fermentation process? Journal of Emerging Technologies in Accounting, 4(1), 87-101.

Ohlson, J. A. (1980). Financial ratios and the probabilistic prediction of bankruptcy. Journal of Accounting Research, 109-131.

Pervan, M., & Višić, J. (2012). Influence of firm size on its business success. Croatian Operational Research Review, 3(1), 213-223.

Saunders, M. N. (2011). Research Methods for Business Students. Pearson Education India.

Senbet, L. W., & Wang, T. Y. (2012). Corporate financial distress and bankruptcy: A survey. Foundations and Trends in Finance, 5(4), 243-335.

Theodossiou, P., Kahya, E., Saidi, R., & Philippatos, G. (1996). Financial distress and corporate acquisitions: Further empirical evidence. Journal of Business Finance & Accounting, 23(5‐6), 699-719.

Thornhill, S., & Amit, R. (2003). Learning about failure: Bankruptcy, firm age, and the resource-based view. Organization Science, 14(5), 497-509.

Thynne K. (2006), “Test of the Generalizability of Altman‟s Bankruptcy. Prediction Model,” Journal of Business Research, 53-61.

Venkataramana, N., Azash, S., & Ramakrishnaiah, K. (2012). Financial performance and predicting the risk of bankruptcy: A case of selected cement companies in India. International Journal of Public Administration and Management Research (IJPAMR), 1(1), 40-56.

Waqas, H., & Bahrain, S. (2019). Risk management, capital adequacy and audit quality for financial stability: Assessment from commercial banks of Pakistan. Asian Economic and Financial Review, 9(6), 654-664.
How to Cite
Tarus, J. (2022, June 28). Do Firm Size and Leverage Determine Distance to Corporate Bankruptcy? Evidence from Listed Firms in Kenya. African Journal of Education,Science and Technology, 7(1), Pg 219-227. Retrieved from