Financial Risk Hedging Practices and Performance of Firms Listed in Nairobi Securities Exchange (NSE), Kenya.
Kiio, J. M.
Jagongo, A. O.
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With the ever changing and challenging business environment, businesses continue to be exposed to various risks more especially as a result ofadverse fluctuations in the macroeconomic environment and increased competition. Firms operating in such volatile environment are mostly vulnerable to financial risk. In Kenya today a number of firms are making losses due to lack of proper hedging and applying costly practices to mitigate these risks. For instance, in 2015,two giant firms, Kenya Airways and Uchumi Supermarketsreported 25.7 billion shillings and 262.3million shillings losses respectively which was associated to lack of proper hedging practices. This study therefore sought to investigate the influence of financial risk hedging practices on the performance of firms in NSE. The study had four specific objectives which were to assess the effect of foreign exchange hedging practices,examine the influence of commodity price hedging practices, to evaluate the effect of interest rate hedging practices and to examine the effect of equity risk hedging practices on the performance of listed firms at the NSE. The study applied both descriptive and inferential statistics to analyze collected quantitative data. In descriptive analysis the study used the mean and standard deviation to measure the average distribution and variation, respectively. The inferential statistics employed the use of multiple regression model. The regression model enabled the researcher to analyze the variation in performance caused by the use of futures, forwards, options or swaps to hedge on foreign exchange, interest rate and commodity price risks. Data on the return on invested capital (ROIC) and return on assets (ROA) was collected from the firm’s financial statements for the last five years 2011-2015.The mean score of the study variables: foreign exchange hedging practices (mean=3.6311); commodity pricing risk hedging practices (mean=3.8693); interest rate risk hedging practices (mean=3.6406); equity hedging practices (mean=3.9369) and central bank controls (mean=3.9922) indicated influence to a slightly high extent. The study established a positive relationship between hedging practices, the moderator (central bank controls) and dependent variable performance of listed firms. The R2 of the study increased from 0.391 without the moderator variable (central bank controls) to 0.617 when the model regressed includes the moderator variable.