Journal of Finance and Accounting

Submit a Manuscript

Publishing with us to make your research visible to the widest possible audience.

Propose a Special Issue

Building a community of authors and readers to discuss the latest research and develop new ideas.

The Moderating Effect of Firm Size on the Relationship Between Capital Structure and Financial Distress of Non-Financial Companies Listed in Kenya

This paper sought to establish the moderating effect of firm size on the relationship between capital structure and financial distress of listed non-financial firms in Kenya. Firm size was measured using the natural logarithm of total assets while capital structure was operationalized by total debt, long-term debt and short term debt financing. The degree of financial distress was measured using the Altman’s Z-score index as reviewed for the emerging markets. Secondary data from audited and published financial statements was collected on the 40 listed non-financial firms between year 2006 and 2015. The study estimated the specified panel regression model for fixed effects as supported by the Hausman test results. Feasible Generalized Least Squares (FGLS) regression results revealed that firm size has a significant moderating effect on the relationship between capital structure and financial distress of non-financial firms. Specifically, the study found that although generally debt has a negative and significant effect on financial distress of the studied companies, this effect becomes positive and significant as the size of the firm increases. The study further found that use of long term debt has a positive and significant effect among large-scale firms while short term debt is significantly detrimental. On the basis of these empirical findings, the study recommended that managers of listed non-financial companies should always consider the size of the firm in making leverage choice decisions for their entities.

Capital Structure, Financial Distress, Firm Size

Robert Gitau Muigai, Jane Gathigia Muriithi. (2017). The Moderating Effect of Firm Size on the Relationship Between Capital Structure and Financial Distress of Non-Financial Companies Listed in Kenya. Journal of Finance and Accounting, 5(4), 151-158.

Copyright © 2017 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License ( which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

1. Altman, E. I. (2000). Predicting financial distress of companies: revisiting the Z-score and ZETA models. Stern School of Business, New York University, 9-12.
2. Amato, L. H., & Burson, T. E. (2007). The effects of firm size on profit rates in the financial services. Journal of Economics and Economic Education Research, 8 (1), 67.
3. Andrade, G., & Kaplan, S. N. (1998). How costly is financial (not economic) distress? Evidence from highly leveraged transactions that became distressed. The Journal of Finance, 53 (5), 1443-1493.
4. Artikis, G. P., Eriotis, N., Vasiliou, D., & Ventoura-Neokosmidi, Z. (2007). How firm characteristics affect capital structure: An empirical study. Managerial Finance, 33 (5), 321-331.
5. Babalola, Y. A. (2013). The effect of firm size on firms profitability in Nigeria. Journal of Economics and Sustainable Development, 4 (5), 90-94.
6. Baimwera, B., & Muriuki, A. (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.
7. Baltagi, B. H., Bratberg, E., & Holmås, T. H. (2005). A panel data study of physicians' labor supply: The case of Norway. Health Economics, 14 (10), 1035-1045.
8. Chen, J. J. (2004). Determinants of capital structure of Chinese-listed companies. Journal of Business Research, 57 (12), 1341-1351.
9. Dittmar, A. (2004). Capital structure in corporate spin‐offs. The Journal of Business, 77 (1), 9-43.
10. Fairchild, A. J., & MacKinnon, D. P. (2009). A general model for testing mediation and moderation effects. Prevention Science, 10 (2), 87-99.
11. Gonenc, H. (2005). Comparison of debt financing between international and domestic firms: Evidence from Turkey, Germany and UK. International Journal of Managerial Finance, 1 (1), 49-68.
12. Granger, C. W., & Newbold, P. (1974). Spurious regressions in econometrics. Journal of Econometrics, 2 (2), 111-120.
13. Gujarati, D. (2003). Basic Econometrics (4 Edition). New Delhi, DN: McGraw Hill.
14. Gupta, P., Srivastava, A., & Sharma, D. (2014). Capital structure and financial performance: Evidence from India. International Research Journal, 2 (6), 112-126.
15. Jónsson, B. (2008). Does the size matter? The relationship between size and profitability of Icelandic firms. Bifröst Journal of Social Science, 1 (6), 113-124.
16. Khan, A. G. (2012). The relationship of capital structure decisions with firm performance: A study of the engineering sector of Pakistan. International Journal of Accounting and Financial Reporting, 2 (1), 245 - 262.
17. Lee, J. (2009). Does size matter in firm performance? Evidence from US public firms. International Journal of the Economics of Business, 16 (2), 189-203.
18. Maina, L., & Ishmail, M. (2014). Capital structure and financial performance in Kenya: Evidence from firms listed at the Nairobi Securities Exchange. International Journal of Social Sciences and Entrepreneurship, 1 (11), 209-223.
19. Marsh, P. (1982). The choice between equity and debt: An empirical study. The Journal of Finance, 37 (1), 121-144.
20. Mugenda, & Mugenda. (2003). Research methods quantitative and qualitative approaches. Nairobi, Kenya: African Center for Technology Studies.
21. Muigai, R. G. (2016). Effect of Capital Structure on Financial Distress of Non-Financial Companies Listed in Nairobi Securities Exchange. COHRED, Finance, JKUAT.
22. Mule, R. K., Mukras, M. S., & Nzioka, O. M. (2015). Corporate size, profitability and market value: An econometric panel analysis of listed firms in Kenya. European Scientific Journal, 11 (13), 376 - 396.
23. Mwangi, Muathe, S., & Kosimbei, G. (2014). Relationship between capital structure and performance of non-financial companies listed in the Nairobi Securities Exchange, Kenya. Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics, 1 (2), 72-90.
24. Ohlson, J. A. (1980). Financial ratios and the probabilistic prediction of bankruptcy. Journal of Accounting Research, 1 (1), 109-131.
25. Outecheva, N. (2007). Corporate financial distress: An empirical analysis of distress risk. Doctoral dissertation, University of St. Gallen, Switzerland.
26. Ozgulbas, N., Koyuncugil, A., & Yilmaz, F. (2006). Identifying the effect of firm size on financial performance of SMEs. The Business Review, Cambridge, 6 (1), 162-167.
27. Pandey, I. M. (2009). Essentials of Financial Management (1st Edition). New Delhi: DN, Vikas Publishing House Ltd.
28. Papadogonas, T. A. (2006). The financial performance of large and small firms: Evidence from Greece. International Journal of Financial Services Management, 2 (2), 14-20.
29. Papadogonas, T. A. (2006). The financial performance of large and small firms: evidence from Greece. International Journal of Financial Services Management, 2 (1-2), 14-20.
30. Saunders, M. L., & Lewis, P. and Thornhill, A. (2009), Research Methods for Business Students. London: UK, Financial Times Prentice Hall Inc.
31. Serrasqueiro, Z. S., & Nunes, P. M. (2008). Performance and size: empirical evidence from Portuguese SMEs. Small Business Economics, 31 (2), 195-217.
32. Surajit, B., & Saxena, A. (2009). Does the Firm Size Matter? An Empirical Enquiry into the Performance of Indian Manufacturing Firms. SSRN.[Online]. Available at: http://ssrn. com/abstract, 1300293.
33. Torres-Reyna, O. (2007). Panel data analysis fixed and random effects using Stata (v. 4.2). Data & Statistical Services, Princeton University.
34. Velnampy, T. (2013). Corporate governance and firm performance: a study of Sri Lankan manufacturing companies. Journal of Economics and Sustainable Development, 4 (3), 228-235.
35. Vijayakumar, A., & Tamizhselvan, P. (2010). Corporate size and profitability: An empirical analysis. Journal for Bloomers of Research, 3 (1), 44-53.
36. Wiggins, V., & Poi, B. (2001). How do I test for panel-level heteroskedasticity (5th Ed). Italy: Prentice Hall.