STOCK LIQUIDITY, GROWTH OPPORTUNITIES AND DEFAULT RISK AMONG NONFINANCIAL FIRMS LISTED IN KENYA
Abstract
Objective: This paper analyses the impact of stock liquidity and growth opportunities on default risk of nonfinancial listed firms in Kenya.
Research Methodology: The study employs panel data analysis to study the 31 nonfinancial listed firms between 2011 and 2020. Default risk is estimated by Merton’s (1974) distance to default, stock liquidity is conceptualized as price impact and trading quantity, while growth opportunities is measured by the ratio of market to book value. The study employs the random effect to test the hypotheses based on the results of the Hausman test.
Results and findings: The results revealed that the stock liquidity had statistically significant effect on default risk, while growth opportunities had a moderating effect. Furthermore, tangibility, institutional ownership, firm size, firm profitability and leverage were also found as exerting a significant effect on default risk.
Recommendations: Managers may consider financing growth opportunities by leveraging on stock liquidity, which may lower the likelihood of default risk.
Keywords: Default risk, stock liquidity, growth opportunities, listed firms, Kenya
References
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Alimoradi, A., Khademvatani, A., & Gholami, F. (2020). The Relationship between Stock Liquidity (from Corporate Governance and Informational Efficiency Points of View) and Default Risk in Iran's Petrochemical Industry and Oil Products Companies. Petroleum Business Review, 4(1), 13-34.
Almazan, A., Hartzell, J. C., & Starks, L. T. (2005). Active institutional shareholders and costs of monitoring: Evidence from executive compensation. Financial management, 34(4), 5-34.
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Bakke, T. E., & Whited, T. M. (2010). Which firms follow the market? An analysis of corporate investment decisions. The Review of Financial Studies, 23(5), 1941-1980.
Bharath, S. T., & Dittmar, A. K. (2006). To be or not to be (public). In University of Michigan Ross School of Business Research Paper, EFA 2007 Ljubljana Meetings Paper, AFA 2008 New Orleans Meetings Paper.
Bharath, S. T., & Shumway, T. (2008). Forecasting default with the Merton distance to default model. The Review of Financial Studies, 21(3), 1339-1369.
Bilinski, P., & Mohamed, A. (2015). The signaling effect of durations between equity and debt issues. Financial Markets, Institutions & Instruments, 24(2-3), 159-190.
Chava, S., & Purnanandam, A. (2010). Is default risk negatively related to stock returns?. The Review of Financial Studies, 23(6), 2523-2559.
Chiang, S. M., Chung, H., & Huang, C. M. (2015). A note on board characteristics, ownership structure and default risk in T aiwan. Accounting & Finance, 55(1), 57-74.
Curry, T. J., Fissel, G. S., & Elmer, P. J. (2004). Can the equity markets help predict bank failures?.
Doostian, R., & Farhad Toski, O. (2022). The probability of informed trading and stock liquidity. International Journal of Finance & Managerial Accounting, 7(27), 171-186.
Dow, J., & Gorton, G. (1997). Stock market efficiency and economic efficiency: Is there a connection?. The Journal of Finance, 52(3), 1087-1129.
Duan, J. C., & Zou, Q. (2014). Liquidity and default. Available at SSRN 2450890.
Eckbo, B. E., & Norli, Ø. (2005). Liquidity risk, leverage and long-run IPO returns. Journal of Corporate Finance, 11(1-2), 1-35.
Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of corporate finance, 18(2), 389-411.
Gaver, J. J., & Gaver, K. M. (1993). Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Accounting and economics, 16(1-3), 125-160.
Gniadkowska-Szymańska, A. (2022). The liquidity of shares and the risk of bankruptcy. Bank i Kredyt, 53(6), 565-586.
Goyal, V. K., & Wang, W. (2013). Debt maturity and asymmetric information: Evidence from default risk changes. Journal of Financial and Quantitative Analysis, 48(3), 789-817.
Holden, C. W., & Subrahmanyam, A. (1992). Long‐lived private information and imperfect competition. The Journal of Finance, 47(1), 247-270.
Holmström, B., & Tirole, J. (1993). Market liquidity and performance monitoring. Journal of Political economy, 101(4), 678-709.
Khanna, N., & Sonti, R. (2004). Value creating stock manipulation: feedback effect of stock prices on firm value. Journal of financial markets, 7(3), 237-270.
Lyandres, E., & Zhdanov, A. (2013). Investment opportunities and bankruptcy prediction. Journal of Financial Markets, 16(3), 439-476.
Marosi, A., & Massoud, N. (2007). Why do firms go dark?. Journal of Financial and Quantitative Analysis, 42(2), 421-442.
Massa, M., Yasuda, A., & Zhang, L. (2010, October). Investment horizon of the bond investor base and the leverage of the firm. In AFA 2009 San Francisco Meetings Paper.
Mohamed, A., & Seelanatha, S. L. (2014). The global financial crisis (GFC), equity market liquidity & capital structure: Evidence from Australia. Journal of Applied Research in Accounting and Finance (JARAF), 9(1).
Nadarajah, S., Duong, H. N., Ali, S., Liu, B., & Huang, A. (2021). Stock liquidity and default risk around the world. Journal of financial markets, 55, 100597.
Nie, Z., Ling, X., & Chen, M. (2023). The power of technology: FinTech and corporate debt default risk in China. Pacific-Basin Finance Journal, 78, 101969.
Odders-White, E. R., & Ready, M. J. (2006). Credit ratings and stock liquidity. The Review of Financial Studies, 19(1), 119-157.
Ogachi, D., Ndege, R., Gaturu, P., & Zoltan, Z. (2020). Corporate bankruptcy prediction model, a special focus on listed companies in Kenya. Journal of Risk and Financial Management, 13(3), 47.
Shih, Y. C., Wang, Y., Zhong, R., & Ma, Y. M. (2021). Corporate environmental responsibility and default risk: Evidence from China. Pacific-Basin Finance Journal, 68, 101596.
Subrahmanyam, A., & Titman, S. (2001). Feedback from stock prices to cash flows. The Journal of Finance, 56(6), 2389-2413.
Switzer, L. N., & Wang, J. (2013). Default risk and corporate governance in financial vs. non-financial firms. Risk and Decision Analysis, 4(4), 243-253.
Switzer, L. N., Wang, J., & Zhang, Y. (2018). Effect of corporate governance on default risk in financial versus nonfinancial firms: Canadian evidence. Canadian Journal of Administrative Sciences/Revue Canadienne des Sciences de l'Administration, 35(2), 313-328.
Tse, Y., & Zabotina, T. V. (2001). Transaction costs and market quality: Open outcry versus electronic trading. Journal of Futures Markets: Futures, Options, and Other Derivative Products, 21(8), 713-735.
Alimoradi, A., Khademvatani, A., & Gholami, F. (2020). The Relationship between Stock Liquidity (from Corporate Governance and Informational Efficiency Points of View) and Default Risk in Iran's Petrochemical Industry and Oil Products Companies. Petroleum Business Review, 4(1), 13-34.
Almazan, A., Hartzell, J. C., & Starks, L. T. (2005). Active institutional shareholders and costs of monitoring: Evidence from executive compensation. Financial management, 34(4), 5-34.
Atif, M., & Ali, S. (2021). Environmental, social and governance disclosure and default risk. Business Strategy and the Environment, 30(8), 3937-3959.
Bakke, T. E., & Whited, T. M. (2010). Which firms follow the market? An analysis of corporate investment decisions. The Review of Financial Studies, 23(5), 1941-1980.
Bharath, S. T., & Dittmar, A. K. (2006). To be or not to be (public). In University of Michigan Ross School of Business Research Paper, EFA 2007 Ljubljana Meetings Paper, AFA 2008 New Orleans Meetings Paper.
Bharath, S. T., & Shumway, T. (2008). Forecasting default with the Merton distance to default model. The Review of Financial Studies, 21(3), 1339-1369.
Bilinski, P., & Mohamed, A. (2015). The signaling effect of durations between equity and debt issues. Financial Markets, Institutions & Instruments, 24(2-3), 159-190.
Chava, S., & Purnanandam, A. (2010). Is default risk negatively related to stock returns?. The Review of Financial Studies, 23(6), 2523-2559.
Chiang, S. M., Chung, H., & Huang, C. M. (2015). A note on board characteristics, ownership structure and default risk in T aiwan. Accounting & Finance, 55(1), 57-74.
Curry, T. J., Fissel, G. S., & Elmer, P. J. (2004). Can the equity markets help predict bank failures?.
Doostian, R., & Farhad Toski, O. (2022). The probability of informed trading and stock liquidity. International Journal of Finance & Managerial Accounting, 7(27), 171-186.
Dow, J., & Gorton, G. (1997). Stock market efficiency and economic efficiency: Is there a connection?. The Journal of Finance, 52(3), 1087-1129.
Duan, J. C., & Zou, Q. (2014). Liquidity and default. Available at SSRN 2450890.
Eckbo, B. E., & Norli, Ø. (2005). Liquidity risk, leverage and long-run IPO returns. Journal of Corporate Finance, 11(1-2), 1-35.
Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of corporate finance, 18(2), 389-411.
Gaver, J. J., & Gaver, K. M. (1993). Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Accounting and economics, 16(1-3), 125-160.
Gniadkowska-Szymańska, A. (2022). The liquidity of shares and the risk of bankruptcy. Bank i Kredyt, 53(6), 565-586.
Goyal, V. K., & Wang, W. (2013). Debt maturity and asymmetric information: Evidence from default risk changes. Journal of Financial and Quantitative Analysis, 48(3), 789-817.
Holden, C. W., & Subrahmanyam, A. (1992). Long‐lived private information and imperfect competition. The Journal of Finance, 47(1), 247-270.
Holmström, B., & Tirole, J. (1993). Market liquidity and performance monitoring. Journal of Political economy, 101(4), 678-709.
Khanna, N., & Sonti, R. (2004). Value creating stock manipulation: feedback effect of stock prices on firm value. Journal of financial markets, 7(3), 237-270.
Lyandres, E., & Zhdanov, A. (2013). Investment opportunities and bankruptcy prediction. Journal of Financial Markets, 16(3), 439-476.
Marosi, A., & Massoud, N. (2007). Why do firms go dark?. Journal of Financial and Quantitative Analysis, 42(2), 421-442.
Massa, M., Yasuda, A., & Zhang, L. (2010, October). Investment horizon of the bond investor base and the leverage of the firm. In AFA 2009 San Francisco Meetings Paper.
Mohamed, A., & Seelanatha, S. L. (2014). The global financial crisis (GFC), equity market liquidity & capital structure: Evidence from Australia. Journal of Applied Research in Accounting and Finance (JARAF), 9(1).
Nadarajah, S., Duong, H. N., Ali, S., Liu, B., & Huang, A. (2021). Stock liquidity and default risk around the world. Journal of financial markets, 55, 100597.
Nie, Z., Ling, X., & Chen, M. (2023). The power of technology: FinTech and corporate debt default risk in China. Pacific-Basin Finance Journal, 78, 101969.
Odders-White, E. R., & Ready, M. J. (2006). Credit ratings and stock liquidity. The Review of Financial Studies, 19(1), 119-157.
Ogachi, D., Ndege, R., Gaturu, P., & Zoltan, Z. (2020). Corporate bankruptcy prediction model, a special focus on listed companies in Kenya. Journal of Risk and Financial Management, 13(3), 47.
Shih, Y. C., Wang, Y., Zhong, R., & Ma, Y. M. (2021). Corporate environmental responsibility and default risk: Evidence from China. Pacific-Basin Finance Journal, 68, 101596.
Subrahmanyam, A., & Titman, S. (2001). Feedback from stock prices to cash flows. The Journal of Finance, 56(6), 2389-2413.
Switzer, L. N., & Wang, J. (2013). Default risk and corporate governance in financial vs. non-financial firms. Risk and Decision Analysis, 4(4), 243-253.
Switzer, L. N., Wang, J., & Zhang, Y. (2018). Effect of corporate governance on default risk in financial versus nonfinancial firms: Canadian evidence. Canadian Journal of Administrative Sciences/Revue Canadienne des Sciences de l'Administration, 35(2), 313-328.
Tse, Y., & Zabotina, T. V. (2001). Transaction costs and market quality: Open outcry versus electronic trading. Journal of Futures Markets: Futures, Options, and Other Derivative Products, 21(8), 713-735.
Published
2023-11-16
How to Cite
Wanjala, E. S., Koske, N., & Bonuke, R. (2023). STOCK LIQUIDITY, GROWTH OPPORTUNITIES AND DEFAULT RISK AMONG NONFINANCIAL FIRMS LISTED IN KENYA. African Journal of Emerging Issues, 5(17), 164 - 180. Retrieved from https://ajoeijournals.org/sys/index.php/ajoei/article/view/521
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