Abstract:
Past studies in Kenya on default have concentrated on liquidity as a measure of short term default and
neglected solvency which measures long term default. The current study examined the association
between solvency and liquidity and their effect on profitability in Kenyan listed companies. A total of 41
firms were selected to be in the study sample out of 46 non-financial listed firms in the Nairobi Securities
Exchange during years 2013 to 2017 and panel data regression analysis was employed hence 205 firm
years were analyzed. The findings revealed that liquidity and solvency are significantly and negatively
associated while the default measures lacked a significant relationship with profitability in Kenyan listed
companies. The findings implied that there is no need for firms to focus too much on the relationship
between default and profitability including invest heavily in liquidity in order to meet short term
obligations as nowadays it is possible for firms to either convert non-cash assets quickly or borrow on
short notice from financial institutions in case of an urgent need to meet liquidity shortages. These
findings are consistent with the shitability theory.
