Financial Risks and Its Effect on Financial Performance of Investment Firms Listed at the Nairobi Securities Exchange in Kenya
Abstract
The study investigated financial risks and its effect on the financial performance of investment firms listed at NSE. The study was guided by three research objectives; to determine the influence of foreign exchange risk, liquidity risk, and interest rate risks on the financial performance of investment firms listed at the NSE. The study used secondary data for the period, 2011-2018. The study employed a descriptive research design. The target population was the four investment companies listed on the NSE. Secondary data was collected from the financial annual reports of the firms. Statistical Packages for Social Sciences (SPSS) version 20.0 was used for data analysis. Descriptive statistics, regression analysis, and diagnostic tests were employed. The study concludes that a decrease in liquidity risk results to increased financial performance. A decrease in foreign exchange risk exposure could lead to improved financial performance. The study concludes that interest rate risk was negatively and significantly related to financial performance. Further, the study concludes that firm size had a positive and significant relationship with financial performance. The study recommends that the listed investment firms should increase the current ratio to minimize exposure to financial risks and the firms should also ensure they invest the idle cash to diversify investment portfolio. The study recommends that the management of investment firms should introduce a robust efficient and effective strategies that can assess, identify, and manage foreign exchange risks. Investment firms can also use various financial derivatives to reduce the effect of exchange rate risk. The study recommends that the firms can explore means they can use to improve capacities to manage interest rate risks exposure. For instance, interest rate risks can be mitigated by using financial derivatives and also through securitization of assets to minimize interest rate risks.
Keywords: Financial Risks, Financial Performance, Liquidity Risk, Interest Rate Risks, Foreign Exchange Risk.
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