Relationship between Financial Risk Exposure and Financial Performance of Manufacturing Companies Listed at the Nairobi Securities Exchange Kenya

Abstract

Companies face various risks in the market. While studies have focused on business and market risk as a major risk that of companies in the market, there is still a wide gap that needs to be filled in determining the relationship between the financial risk exposure and financial performance of manufacturing companies listed at the NSE. This was after the literature review of the study established that most studies on financial risk exposure have concentrated mostly on the financial sector with a limited review on the manufacturing sector. Currently, the Kenyan government seeks to achieve its vision 2030 by ensuring that the country is well transformed into manufacturing capacity, which is one of its key pillars. Transformation of the manufacturing sector is one of the Big 4 Agenda that the current government seeks to achieve by the year 2022. The purpose of this study, therefore, was to determine the relationship between financial risk exposure and financial performance of manufacturing companies listed at the Nairobi Securities Exchange emphasizing the fast-moving consumer goods. The predictor variables are liquidity risk, credit risk, operational risk, and interest rates risk exposures. Shift-ability, Transaction cost, and agency theories guided the study.  The study adopted a descriptive research design on the 9 listed manufacturing companies which were used as the target population. Secondary data from the financial statements for each company was considered from 2013 to 2018. Panel data were analyzed using statistical software (STATA). Descriptive analysis was performed and inferential statistics were regression and correlation analysis where moderated multiple regression model was used to test the relationship between the study variables. The results of the study revealed that both liquidity risk exposure (p=0.025) and operational risk exposure (p=0.047) had a significant positive relationship with the financial performance of listed manufacturing firms at the NSE. Also, the study established that there is an insignificant positive relationship between credit risk exposure and financial performance (p=1.113). Consequently, the study findings revealed that there is an insignificant positive relationship between interest rates and the financial performance of listed manufacturing firms at the NSE(p=0.083). This study was carried out on manufacturing companies listed at the NSE. At the center of the discussion was the current economic conditions that have seen some companies closing due to various economic conditions among them financial risk exposures. The study, therefore, recommends that there is a need for future study not only on big manufacturing corporations but also on the small manufacturing companies that are still struggling with understanding issues related to financial risk exposure. The study also recommends that other financial risk exposures such as market risk, foreign exchange, and currency risk need to be included in the future study and their effect investigated in relation the financial performance. While this study may have used ROA as the measure, there is a need for using other different accounting measures to determine financial performance.