Foreign Exchange Risk Hedging Techniques, Firm Specific Factors, Corporate Governance and Financial Performance of Listed Firms in Kenya

Abstract

Globalization, international trade and Kenya’s floating foreign exchange rate regime have exposed Kenyan firms to foreign exchange risk. Some Kenyan firms have embraced riskhedging techniques to mitigate any losses potentially arising from the volatility of the Kenyan shilling, while others have not. Against this background, this study sought to assess the effect of foreign exchange risk hedging techniques on the financial erformance of listed firms in Kenya. The specific objectives were: first, to determine the effect of foreign exchange risk hedging techniques on financial performance; second, to establish whether firm-specific factors mediate the relationship between foreign exchange risk hedging techniques and financial performance; third, to determine the moderating effect of corporate governance on the relationship between foreign exchange risk hedging techniques and financial performance; lastly, to establish whether the joint effect of foreign exchange risk hedging techniques, firm-specific factors and corporate governance on the financial performance was significantly greater than the effect of exchange hedging techniques on financial performance. The study was grounded on the financial economic theory of risk management, the purchasing power parity theory, international fisher effect theory and the transaction cost theory. Longitudinal and cross-sectional research design was used. The target population constituted all the 54 firms that were continuously listed on the Nairobi Securities Exchange during the study period, between 2011 and 2016. Panel secondary data and cross section primary data were used in the study. The data was analyzed using descriptive and inferential statistics, with the aid of STATA software. Feasible Generalized Least Squares model was used to test the hypotheses. The results revealed that: first, hedging techniques had a significant effect on financial performance; secondly, firm-specific factors mediate the relationship between hedging technique and financial performance; third, corporate governance moderates the relationship between hedging techniques and financial performance. Lastly, the findings also confirmed that the joint effect of hedging techniques, firm specific factors and corporate governance on the financial performance was greater than the effect of exchange risk hedging techniques on financial performance. The study makes the following recommendations: first, the Nairobi Securities Exchange and the Capital Markets Authority should expedite the development of the derivatives markets, so that the hedging instruments are easily available. Second, the government should create an enabling environment that will help Kenyan firms increase their asset base hence their size. Lastly, there should be concerted efforts by all stake holders to uphold, encourage and strengthen good corporate governance practices of Kenyan firms.