Relationship between Market Anomalies and Financial Distress of Listed Firms in NSE, Kenya

Abstract

The universal objective of this study is to establish the relationship between market anomalies and financial distress of listed firms in NSE, Kenya. From the overall objective, this study sought to find out if fundamental, technical, seasonal and size effect anomalies have a relationship with financial distress of listed firms in NSE, Kenya and whether these relationships were of statistical significance or not. Due to the market anomalies, firms experience financial distress. This research takes a departure from past researches as it assesses firms undergoing challenges like; financial restructures, receiverships, suspensions or delisted from the stock markets while relating market anomalies to financial distress which created a scholarly gap. It is against this background of not paying attention to the mentioned challenges that this study proposes to establish such a relationship. The literature reviewed established this scholarly gap which this study seeks to fill. It adopts descriptive research design and positivist research. It considered all listed firms in NSE which had been licensed by CMA as at 1st January 2017, totaling to 67 which constitutes the target population. The study adopts secondary data which will be extracted from the audited financial statements from individual firms for an eleven years period, 2007 to 2017. Panel data model will be applicable in this study. The statistical software to be adopted in data analysis and presentation is EView while the p-value will be applicable in hypothesis testing. The Z-Score, a multivariate approach to be applied as the financial prediction model. The results were presented using tables. FAD had a moderate positive correlation while FAE, TAL and SA had weak positive correlations with the dependent variable. TAH and SEA had weak negative correlations with the dependent variable. All the independent variables were statistically significant at five percent level of significance meaning that all the null hypotheses failed to be accepted. The study established that the relationship between market anomalies and financial distress of listed firms in NSE, Kenya. The study’s recommendations will assist the management in putting in place the right policies to guide the firm on the treatment of dividends declaration or non-declaration at the close of the financial trading period of the firm. Investors should make long term investment decisions and also right choices in which stocks worth investing in. The policy makers and regulators should instill sanity in the listed firms and this will enable all the stakeholders to have more confidence in the NSE as it will be more effective and efficient. The findings of this study set a ground for further research in a number of areas; seasonal anomaly has not been exhaustively dealt with, determine if the relationship between the market anomalies and financial distress is linear or not, researchers should look into other measures of firm size other than market capitalization, researchers to examine the financial health of listed firms in NSE in all the economic sectors and a research should be followed through for an extended period of time so as to be considered adequate.