FINANCIAL RESTRUCTURING AND SHAREHOLDERS’ WEALTH OF FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE, KENYA

Abstract

Financial restructuring is essential for maximizing shareholders’ wealth. However, financial
restructuring may also lead to diluted shareholders’ value and increased debt that commits
firms to payout future cash flows thus reducing the funds available for investment purposes
hence lowering shareholders’ wealth. Therefore, this study sought to investigate the effect of
financial restructuring on the shareholders’ wealth of firms listed at the Nairobi Securities
Exchange (NSE). The study was anchored on agency, resource-based view and static trade
off theory and a causal research design was adopted. The target population consisted of 64
listed firms at the Nairobi Securities Exchange as at 31st December 2023. However, adequate data for 54 firms was obtained yielding 534 firm-year observations for the period
2014 to 2023. Secondary data was obtained from the individual firms audited annual reports
using a data collection sheet for ten years. Descriptive statistics summarized the study data
and confirmatory factor analysis ascertained the goodness of fit of the structural equation
modelling. Diagnostic tests were undertaken to ensure that the assumptions of the structural
equation modelling were met. Inferential statistics including correlations and structural
equation modelling were used to test the hypotheses at 5% significance level. The results
revealed that financial restructuring exerts a statistically significant positive influence on
shareholders wealth of listed firms in Kenya (β = 1.160, p = 0.001). The study expands the
existing base of knowledge on financial restructuring and shareholders’ wealth by ensuring
that strategic use of financial restructuring such as refinancing expensive loans, repurchasing undervalued shares, or issuing new equity should be guided by policies and practice of
the listed firms to enhance shareholders’ wealth.