Determinants of Financial Risk of Listed Companies on the Nairobi Securities Exchange in Kenya

Abstract

The purpose of this study was to assess the determinants on financial risk on Companies listed on the Nairobi Securities Exchange (NSE) in Kenya. The study used the existing theoretical underpinnings to identify these determinants and then the purposive sampling method to assess their impact. The study was guided by research objectives which include; assessing how the level of financial leverage, accessibility to financial information, capital structure, cost of capital, and the existing prudential supervision affect the financial risk of companies listed on the NSE in Kenya. The research design used in this study was mixed design employing both the qualitative and quantitative design. Secondary data was extracted from the NSE database, Capital Markets Authority (CMA) database, journals and other publications. Primary data was acquired through administering questionnaires and interviews to a purposive sample of Chief Executive Officers, Chief Financial Officers or Risk Officers of companies publicly listed on the NSE as at 2012. A sample of forty five out of a target population of sixty Companies publicly listed as at January 2012 was extracted from the Nairobi Securities Exchange website. A pre-test on a different sample gave a cronbach’s alpha greater than 0.7 for all the variables. Data analysis was by descriptive statistics and inferential statistics using Statistical Packages for Social Sciences (SPSS) version 24. Analysis of variance (ANOVA) was used to establish if there is a statistical significance between the observed and expected values with the Pearson chi square giving the degree significance of the relations, hence establishing the hypothesis. The results indicate that four of the variables, level of leverage, cost of capital, capital structure and prudential supervision have a positive and significant effect on financial risk. Accessibility of financial information has a weak negative correlation with financial risk of listed companies on the NSE, typical with financial markets which are not strong. The study gives recommendations which include the adoption of proper financial risk management systems and improving the efficiency of prudential regulation and supervision procedures in order to improve compliance.