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MULTIDISCPLINARY RESEARCH
© OIRC Journals, 2018 ISSN: 2523-9430 (Online Publication)
www.oircjournals.org ISSN: 2523-9422 (Print Publication)
BIG OR SMALL?
DOES BOARD SIZE MATTER IN TIMES OF FINANCIAL DISTRESS? EVIDENCE FROM
KENYAN LISTED FIRMS- A PANEL APPROACH
Model Specification
Zit=β0+β1Iit+ β2FSit+ β3Pit + εit……………………………………...…………………………...…...…..……Model 1
Zit= Financial distress of the firm i (i=1, 2….57) in time t (t=1, 2…10)
Where
BS =Board size of firm i in time t, FS= Firm Size, I= Industry Dummy, P=Profitability, ε= the random
error term
4.5 Testing for Multi-Collinearity (Cohen et al., 2003). Tolerance is equal to the
In addition to regression assumption the inverse of VIF. According to Gujrati (2004) the
multcollinearity tes was done. Multcolinearity closer Tolerance is to zero, the greater the
means that two or more of the explanatory degree of collinearity of that variable with other
variables in a regression have a linear regressors. On the other hand, the closer
relationship. This causes problems in the Tolerance is to 1, the greater the evidence that
interpretation of regression results. Multi- the variable is not collinear with other
collinearity can also be tested by calculating the regressors. This study followed the procedure
correlation coefficients for the predictor set out by (Gujrati, 2004) that included the use
variables. A tolerance of below 0.10 or a VIF of TOL and VIF. As shown in the Table 4.4, the
greater than 10 or a correlation coefficient tolerance statistics were all above 0.10 and VIF
above 0.8 is regarded as indicative of serious values were all below 10 implying that there
multi-collinearity problems (Field, 2009). The was no problem of multicollinearity among the
VIF is one popular measure of multicollinearity predictor variables.
Table 4.4: Collinearity Statistics for Predictor Variables
4.6 Testing for Unit Roots yields statistically better results compared to
Further, the study was subjected to unit root the results of unit root tests like Philips-Perron
test. According Gujrati (2003) and Granger and which are based on a single time series.
Newbold (1974) data series must be primarily This study conducted unit root test for the
tested for stationarity in all econometric variables using the Augmented-Dickey-Fuller
studies. Where a series is found to be non- unit root test. As shown in Table 4.5 the p-
stationary at levels, it is differenced until it values for the ADF-Fisher Chi-square statistic
becomes stationary (Gujrati, 2004; 2003 and were less than theoretical values of 0.05
Baltagi, 2001). Since panel data models were financial distress. This implies that these
used in this study and the data set had a time variables/ panels (had no unit roots) and
dimension unit root existence was investigated therefore suitable for modelling and
by panel unit root tests. Maddala and Wu forecasting. To correct for non stationarity in
(1999) suggest that using panel unit root tests board size, firm size the first difference of the
4.6 Model Specification Tests Statistics not differ significantly, with the fixed effects
Model specification was done using the being used when there are differences in the
random effects model to construct panel slope coefficients. Accordingly, the null
regression models. The decision for using hypothesis is rejected when Prob.>χ2 is less
random effects models in this study was based than the critical p-value and in such a case the
on the Hausman specification test (Wooldridge, fixed effects regression is appropriate.
2002; Greene, 2002). According to Gujrat (2004) Hausman test results of these three models are
Hausman specification test should be used to presented along with panel regression results
determine between random and fixed effects. are shown in Table 4.7. All the models were run
Baum (2001) opines that Hausman specification on random effects since the significance levels
test tests the null hypothesis that the slope were greater than the critical value of 0.05.
coefficients of the models being compared do
Table 4.6: Model Specification Test Statistics for Z score
Model χ2 Statistic χ2 d.f. Prob. Appropriate Model
The study established that board size does not significantly affect financial distress. Hence the size
of the board in the Kenyan listed forms does not matter.
5.0 Recommendations for Further Research Secondly, the study do recommend more board
The following suggestions were made for composition variables to be included in future
further research based on the findings of this research like ownership, audit committee
study; composition, ethnicity, gender, age and level of
Given the apparent consequences of financial education with financial distress.
distress, this study would welcome further Thirdly, this study only incorporated listed
research addressing factors that may firms with complete data. The study therefore
predispose a firm to financial distress, impede recommends future studies to incorporate
the implementation of effective counter those firms with incomplete data.
strategies during the decline period, and permit
the firm to survive.
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