Foreign Exchange Risk Hedging, Corporate Governance and Financial Performance: Evidence From Kenya

Abstract

Globalization, Kenya’s floating foreign exchange rate regime, and international trade have exposed Kenyan firms to foreign exchange risk. Empirical studies have demonstrated that hedging minimizes cash flow volatility, hence enhancing financial performance.  The management of these risks is critical in overall financial management, since its helps increase the financial performance and the overall returns earned by investors. Understanding factors that influence foreign exchange risks hedging is a crucial step to the effectiveness of the overall risk management process. Against this background, this study sought to evaluate the effects of foreign exchange risk hedging, corporate governance and the financial performance of listed companies in Kenya. The target population constituted all the 54 firms that were continuously listed on the Nairobi Securities Exchange during the study period, from 2011 to 2016. The study used longitudinal research design. Secondary data was obtained from financial statements of the listed firms. The data was coded and analysed using descriptive and inferential statistics—correlation and regression—with the aid of STATA software. The feasible generalised least square model was used to test the hypotheses. The results show currency hedging has a positive effect on financial performance.  The study also revealed that corporate governance, moderates the relationship between foreign exchange risk hedging and financial performance. In the light of this findings, management should explore the whole repertoire of risk amelioration techniques, particularly those available in the roster of innovative techniques of hedging. In order to take full advantage of such techniques, however, the regulator and the securities exchange must lead from the front by introducing cutting-edge financial instruments. In addition firms should endeavor to strengthen corporate governance which enhances the effectiveness of risk management.

Keywords: Foreign Exchange risk, Hedging Techniques, Corporate Governance.

DOI: 10.7176/RJFA/10-5-08

Publication date:March 31^st 2019