Effect of Financial Distress Likelihood on Financial Performance of Firms Listed on the East African Community Exchange Markets
Keywords:
Financial Performance, Financial Distress Likelihood, East African Community Exchange MarketsAbstract
An effective listed firm’s financial performance is vital to economic growth through employment creation, GDP growth, capital mobilization and other commitment policies. However, the current dynamic business environment is characterized by poor financial performance, a significant concern for listed firms, which leads to collapse, suspension, and delisting from exchange markets. This matter calls for immediate intervention, as its persistence may affect their capacity to contribute to economic development. Despite the numerous studies on this phenomenon, there has been inadequate attention to the impact of financial distress likelihood on financial performance of firms listed on the East African Community exchange markets. Thus, the study fills the knowledge gap by investigating this relationship. The study was anchored by positivist philosophy and guided by explanatory and longitudinal research designs. The study targeted 112 firms; after inclusion and exclusion criteria, the study focused on 48 firms. Moreover, it utilized secondary data extracted from financial reports that were audited for a 10-year period, from 2015 to 2024, yielding 480 observations. The study found that financial distress likelihood had a negative but significant link with financial performance (β = -0.0253, p < 0.05). This study revealed that the predictor significantly affects the outcome variable in the context of East African Community exchange markets, hence contributing significantly to the body of knowledge. The study thus concludes that safeguarding listed firms against conditions that elevate financial distress likelihood is critical in preserving financial performance. One of the study’s recommendations is that the firms’ management should establish sound financial distress monitoring systems that offer early warning signals and allow timely corrective measures before financial distress likelihood adversely affects the firm’s financial performance. Additionally, policymakers need to streamline disclosure requirements for financial distress signals in financial reporting.
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