Financial Risk Management and Performance of Investment Firms Listed at Nairobi Securities Exchange, Kenya
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Date
2024-04
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Kenyatta University
Abstract
Investment firms play a pivotal role in the economic landscape of Kenya, contributing significantly to GDP and employment levels. The financial performance of these firms is of utmost importance, providing a comprehensive view of their overall stability and communicating their financial well-being to investors. However, recent trends suggest a concerning decline in the financial performance of these firms, necessitating a closer examination of their financial risk management practices. This study investigates the effect of financial risk management strategies, focusing on interest rate risk, exchange rate risk, inflation rate risk, and liquidity risk, on the financial performance of listed investment firms in Kenya. Additionally, it explores the moderating effect of firm size on this relationship. The study hypotheses were evaluated at the 0.05 level of significance. Expectations Theory of Exchange Rates, Arbitrage Pricing Theory, Agency Theory, Liquidity Preference Theory, and Modern Portfolio Theory were the theories underpinning the study. Using a positivist research philosophy and explanatory research design, data spanning from 2014 to 2021 were collected from five selected investment firms, with 40 respondents purposively sampled. Techniques including descriptive statistics and multiple regression analysis were employed to analyse the data. To ensure that the data is suitable for multiple regression analysis, diagnostic tests (multicollinearity, normality, and heteroscedasticity) were performed. The data was visually represented through the use of tables, charts and graphs. The study took into account all the necessary ethical considerations. The findings reveal significant positive effects of interest rate risk management (p = 0.025), exchange rate risk management (p = 0.017), inflation rate risk management (p = 0.020), and liquidity risk management (p = 0.007) on financial performance. Moreover, firm size significantly moderates this relationship (p = 0.002). The study underscores the critical need for effective financial risk management strategies within investment firms. Recommendations include implementing currency invoicing and exposure netting to manage exchange rate risk, utilizing financial instruments such as forward rate agreements to mitigate interest rate risk, optimizing net working capital for liquidity risk management, and adopting portfolio adjustment techniques for inflation rate risk management. The study suggests that policymakers in Kenya should take an active role in encouraging investment firms to provide comprehensive risk disclosures in their financial reports. Furthermore, future research could delve into individual variables' effects on investment firms' financial performance, expanding beyond listed entities to encompass the broader Kenyan context.
Description
A Thesis Submitted to the School of Business, Economics and Tourism in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Science in Finance of Kenyatta University, April, 2024