Profitability, Leverage, Efficiency and Financial Distress in Commercial and Manufacturing State Corporations in Kenya

Purpose: The major goal was to investigate effect of profitability, leverage, and efficiency on financial distress in Kenya's State Corporations in the commercial and manufacturing sector. The study also attempted to determine moderating effect of size on relationship between profitability, leverage, efficiency, and financial distress in Kenyan Commercial and Manufacturing Corporations. Methodology: Positivist philosophy and explanatory non-experimental research approach were used in this investigation. The study's population consisted of 25 State Corporations in Kenya in Commercial and manufacturing category. For the purposes of this study, a census of all 25 Commercial and Manufacturing Corporations was employed in study. Secondary data from audited accounts of state corporations for period 2015-2020 was used in analysis. Binary logistic regression was used in analysis. Diagnostics tests included multicollinearity, heteroscedasticity, likelihood ratio and autocorrelation tests. STATA statistical software was used to analyse data. Findings were presented using tables. Findings: The research outcomes indicated that profitability had significant effect on financial distress of commercial and manufacturing state corporations. Results also indicated that leverage had insignificant effect on financial distress. Efficiency also had significant effect on financial distress. The study adopted the product term interaction model approach in testing moderating effect of firm size on relationship between profitability, leverage and efficiency on financial distress. There was evidence showing that firm size significantly moderated the relationship between efficiency and financial distress in commercial and manufacturing state corporations in Kenya. Unique Contribution to Theory, Practice and Policy: This study relied on Agency, Stewardship, Efficiency, Pecking-order and Trade-off theories.The results indicated that profitability and efficiency variables are useful to management, those charged with governance and users of financial statement information in detection and mitigation of financial distress. The management and users of financial statements information should pay attention particularly to profitability and efficiency ratios. Findings are also useful to the government by providing an insight of distressed firms so that the exchequer can know and make prudence decision on the distressed state corporations that require financial bailouts. Lastly, this study adds a contribution to the limited literatures on financial distress in commercial and manufacturing state corporations in Kenya.