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 performance 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.