Effect Of Risk On Financial Performance Of Agricultural Companies Listed On Nairobi Securities Exchange

Abstract

Agricultural sector in Kenya is exposed to various risks which originate from both the internal and external environment. Long term sustainability and financial viability of agricultural firms is threatened by risk exposure. Key categories of risks such as operational, liquidity and credit risks possess a major challenge despite the steady growth recently experienced in the Kenyan agricultural sector. In line with the challenges experienced, the study sought to establish the extent to which operational risk, liquidity risk and credit risk affect the financial performance of agricultural firms listed on Nairobi Securities Exchange. The target population were the six agricultural firms listed on NSE for the period between the year 2009 and 2018. A descriptive research design was adopted for the study and data obtained was edited and coded for the purposes of data analysis. Data was further summarized using descriptive statistics such as measure of central tendency, measures of variability, and measures of reliability and frequency among others. Diagnostic tests such as Wooldridge test, Modified Wald test and Hausman tests were also run to specify the regression model to be run. STATA software was used in analysis of the panel data. Panel data was analysed and data obtained from Nairobi Securities Exchange and published annual report and financial statements of the six agricultural firms listed on NSE and the individual firms’ website. Data was analysed using panel data regression model. The results of the analysis indicated that the null hypothesis that operational risk, liquidity risk and credit risk have negative effect on financial performance on agricultural companies listed on NSE was rejected at 5 percent significance. The study recommends that proper guidelines and procedures to be put into place to ensure operational risk is well mitigated and effective lease arrangements also be instituted in order to curb risk associated with agricultural produce. In addition, the management should maintain assets which can be easily converted into cash and cash equivalents when need arises in order to curb cash flow constraints and the management should maintain lower inventory levels. Further, the companies should come up with proper credit risk transfer mechanisms and policies to curb credit risk. The study therefore concludes that operational risk, liquidity risk and credit risk negatively affects financial performance of agricultural companies listed on NSE.