Financial Risk And Performance Of Commercial And Services Listed Companies In Nairobi Securities Exchange, Kenya

ABSTRACT

There has been a declining trend in the performance of companies in Nairobi Securities Exchange in the recent past with seventeen companies issuing profit warnings to investors in the year 2019, fifteen in 2018, while eighteen firms issued in 2015. Most of the firms reporting inadequate profits were listed in the Commercial and Services sector of the Nairobi Securities Exchange. It raises concern whether companies listed in this sector were more exposed to financial risks in the business environment. The declining trend of performance in Commercial and Services listed companies between the years 2013 and 2019 triggered the desire for the researcher to undertake this study. The study’s main purpose investigated how financial risk affected performance of the Commercial and Services companies. The specific objectives established effects of operational, liquidity and credit risks on Commercial Services companies’ performance on Nairobi Securities Exchange. In addition, the study determined how firm size moderated the effect on financial risk on performance of Commercial and Services companies. The study was anchored on agency theory supported by information asymmetry theory and theory of signalling. Explanatory research design was used. The target population was 14 companies under the Commercial and Services segment in the Nairobi Securities Exchange, Kenya. Census of the companies was done. Panel data in published annual reports for the period 2013-2019 was collected. Panel regression model was applied with the random effect model being used based on the Hausman specification test. Findings indicated that credit risk and operational risks had a positive insignificant effect on Return on Equity with liquidity risk having a negative significant effect on Return on Equity. On the other hand, credit risk had a positive significant effect on Return on Assets. On the other hand, liquidity risk had a negative insignificant effect on Return on Assets and operational risk had a positive insignificant effect on Return on Assets. Firm size did not have moderating effect on the relationship between financial risks and firm performance but was rather found to be an explanatory variable. The study concluded that cost to income ratio had the most impact on Return on Assets while Return on Equity was impacted by the current ratio. The study recommends that the management of Commercial and Services companies should use cost to income and current ratios frequently to track how costs are changing and therefore impacting firm performance. Cost to income and current ratios signal an immediate indicator to firms of emerging problems in the cash flow. The study recommends that shareholders and management of companies listed in the Commercial and Services segment could take calculated credit risks to have a sound financial performance and avoid future insolvencies. In addition, the study recommended that firms should find ways of expanding their assets base since it is associated with better financial performance.