Growth Opportunities and Default Risk among Nonfinancial Firm Listed in Kenya

Abstract

This paper analyses the impact of growth opportunities on default risk of nonfinancial listed firms in Kenya. The study employ 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, while growth opportunities is measured by the ratio of market to book value. The study employs the ordinary least squares to test the hypotheses, and both the fixed effect and random effect regression for robustness test. The results show that the growth opportunities has a negative and statistically significant effect on default risk. Furthermore, tangibility, institutional ownership, firm size, firm profitability and leverage were also found as exerting a significant effect on default risk. Managers may consider financing this growth opportunities using equity financing, which may lower the likelihood of default risk.