Effect of Enterprise Risk Management Determinants on Financial Performance of Listed Firms in Kenya

Abstract

Nairobi Security Exchange (NSE) provides avenue for investment opportunities that encourage a thrift culture critical in increasing domestic savings and mobilizing investment resources for rapid industrialization. It is important to note that business failure due to risks affect economic development of a country causing increase in; unemployment, crime and insecurity. These problems compel firms to establish risk management systems to protect themselves. However, management of risks requires a lot of resources which might not be cost effective. Therefore, the purpose of this study was to find out the effect of ERM determinants on financial performance of NSE listed firms in Kenya. Theoretically, ERM adds value to a firm that adopts it; however there is no consensus among scholars on the contribution of ERM on financial performance. The increase in business activities, complexities in business operation, unpredictability and evolving risks have triggered clamor for ERM globally. While there was growing globally attention on ERM in recent years, alarming statistics on increasing and evolving risks continue to affect firms. The empirical evidence shows that risks keep on increasing and evolving, a manifestation of weak risk management systems. This study investigated the effect of ERM determinants on financial performance of listed firms in Kenya. The specific objectives that guided the study were to; analyze the effect of firms’ characteristics on financial performance of listed firms in Kenya, determine the effect of information technology on financial performance of listed firms in Kenya, examine the effect of staff capacity on financial performance of listed firms Kenya, and establish the effect of regulatory framework on financial performance of listed firms in Kenya. A semi structured questionnaire was administered to a finance officer, an auditor and a staff in-charge of ERM department while survey sheet was used to collect secondary data from annual financial statements of each of the listed firms. A census study was used where all listed firms that had submitted audited financial statements to NSE were chosen. The study population composed of a finance officer, an auditor and a risk management officer. The descriptive and inferential statistics were generated and regression analysis was done to test the null hypotheses using F-test at 5 percent level of confidence and interpretation done accordingly. The results were interpreted in line with the reviewed literature and theoretical literature. The major findings from the study show that effective management of ERM determinants (firms’ characteristics, staff capacity, information technology and regulatory framework) has effect on financial performance of the listed firms in Kenya. The results from the study showed that there was a positive correlation between all the independent variables (firms’ characteristics, information technology, staff capacity and regulatory framework) and the dependent variable (financial performance). All the models were significant. The null hypotheses in this study were rejected. The overall model was tested using the F-test at 5 % level of significance. The results of analysis revealed higher inter-correlation between the independent variables and the overall model showed that there was significant correlation between combined ERM determinants and financial performance (p-value 0.000<0.05). However, the multiple linear regression model showed staff capacity was the only significant (p-value 0.000< 0.05) variable in predicting financial performance. The study makes the following recommendations; firms should mobilize resources needed to institute effective risk management system, put in place effective information technology to monitor and report risks and identify risky areas in real-time, build staff capacity on ERM and ensure effective compliance to various regulatory requirements to avoid risk arising from litigation. On the policy implication, the government of Kenya through the National Treasury should create an agency to coordinate development and success of firms to promote economic growth as envisioned in the Vision 2030. Firms should also establish an industry profession association for risk officers to promote compliance to ERM requirements and professionalism.