Effect of Corporate Risk Hedging Practices on Firm Value of Listed Commercial and Service Firms in Kenya

Abstract

Thisstudyaimedtoexaminetheeffectoffinancialriskhedgingpracticesonfirm valueoflistedcommercialandservicefirmsinKenya.Thisstudywasguidedbythe followingfourobjectives:Toexaminetheeffectofliquidityriskhedgingonfirm’svalue oflistedcommercialandservicefirmsinKenya,toassesstheeffectofcreditrisk hedgingonfirmsvalueoffirm’svalueoflistedcommercialandservicefirmsinKenya, todeterminetheeffectofoperationalriskhedgingonfirm’svalueoflistedcommercial andservicefirmsinKenya,todeterminetheeffectofforexriskhedgingonfirm’svalue oflistedcommercialandservicefirmsinKenya.Thestudyemployeddescriptive research design using paneldata analysis.The targetpopulation ofthe study encompassed10listedcommercialandservicefirmsinKenya.Allthe10listed commercialandservicefirmsinKenyaformedthesamplesizeasthestudywasa censusoflistedbanksinKenya.Secondarydatawasextractedfrompublishedannual reportsofindividuallistedcommercialandservicefirms.Thedestructeddatawas recordedondatacollectionsheets.Bothdescriptiveandinferentialstatisticswere used.Descriptiveanalysissuchasmean,frequenciesandstandarddeviationwere used.Forinferentialanalysis,correlationanalysiswasadoptedtotesttheassociation betweenriskhedgingpracticesandfirm valueoflistedcommercialandservicefirms inKenya.SimpleOLSmodelwasusedtoestablishthecausaleffectrelationship.The findings were presented using tables with associated explanations.The study establishedthatcreditriskhedging,liquidityriskhedgingandoperationalriskhedging hadstatisticallysignificanteffectonfirm’svalueoflistedcommercialandservice iv firmsinKenya.However,theeffectforeignexchangeriskhedgingwasnotstatistically significant.Thestudyconcludesthatcorporateriskhedginghasasignificanteffecton firm’svalueoflistedcommercialandservicefirmsinKenya.Thestudyrecommends tomanagementoflistedcommercialandservicefirmsinKenyatoimproveontheir hedgingactivitiestowardscreditrisk.Specifically,thestudyrecommendsthatthe firmsshouldsetasideenoughprovisionsforbadanddoubtfuldebtstocoverforany eventualbaddebts,whichmayhavetobewrittenoff.Secondly,thecurrentstudy wishestorecommendtothetopmanagementoflistedcommercialandservicefirms toensurethefirmsareliquidenoughsuchthattheydonotrunintofinancialdistressa situationwheretheyarenotabletosettleshort-term obligationsastheyfalldue. Finally,thecurrentstudywishestorecommendtothetopmanagementoflisted commercialandservicefirmstocontrolforexriskhowever,sincetheeffectofforex riskhedgingwasnotsignificantespeciallyforfirmswithminimalcurrencyexposers. Keywords:Financialriskhedging,firmValue,forexriskhedging,creditriskhedging andliquidityriskhedging.