Effect Of Financial Risk Exposure On Financial Performance Of Manufacturing Firms Listed At The Nairobi Securities Exchange

Abstract

The economic condition has forced many firms, including those in the manufacturing sector to be put under receivership as a result of financial losses and debts, which are associated with various risk exposures in the firm. The study sought to investigate the effect of financial risk exposure on the financial performance of manufacturing firms listed at the Nairobi Securities Exchange (NSE). The specific objectives were to; determine the influence of credit risk exposure, to establish the influence of liquidity risk exposure and to determine the influence of market risk exposure on the financial performance of manufacturing firms listed at the NSE. A census of Nine (9) listed companies as the target population was taken but only seven (7) companies participated in the study since they have all data for the period of study. The sample size of the study therefore was all the listed companies. Secondary data from the financial statements and other media printed information for a period of 2009 – 2018 was used and data was collected using data collection sheets. Multiple regression model together with the use of STATA software was applied for data analysis. To choose the true model, various diagnostic tests such as normality test, multicollinearity test, heteroscedasticity test and Hausman test was performed to choose the appropriate model of the study. The study findings established that data for the study met all the requirements of diagnostic tests. In Hausman test, the study chose random effect model (REM) as the most appropriate model for use in the study. A trend plot analysis was performed on each variable of the study and performance explained. From the correlation and regression analysis results of the study, the findings revealed that credit risk exposure (RT) had a significant positive relationship with financial performance. Second, the study established that liquidity risk exposure have insignificant positive relationship with financial performance (ROA) of the listed manufacturing companies at the NSE. Lastly, the results also revealed that there was insignificant positive relationship between market risk exposure and financial performance (ROA). The study recommends that the management, policy makers and investors need to develop effective financial risk policies that should help in curbing risks that companies are exposed to in the market so as to improve financial performance. The study further recommends that future study be undertaken on the financial risk exposures using other measures of various financial risks adopted in the study variables. The study recommended that a future study may consider using other financial performance measures like return on equity (ROE) or return on investment (ROI) so as to determine whether the level of consistency in research findings hold. There is also need for the studies to consider other companies listed at the NSE as potential area for research.