Influence of Financial Determinants on Corporate Hedging of Firms in Nairobi Securities Exchange

Abstract

The purpose of this study was to assess the influence of financial determinants on corporate hedging for sixty four firms in the Nairobi Securities Exchange (NSE). The financial determinants on corporate hedging in this study were firm liquidity, firm leverage, firm managerial risk aversion, firm size and firm foreign exchange exposure.Data was gathered from company annual reports of firms and questionnaires which were mailed to the selected investors. The research design used was cross sectional research design. This study used both quantitative and qualitative data in developing a strong evidence base to supporting determinants on corporate hedging of firms in NSE. The study determined sample size through an approach based on precision rate, the calculated sample size constituted one hundred and ninety six people out of target population of 836,250 investors in firms operating in NSE and Chief Officers, Risk Managers and Chief Finance Officers of all sixty four firms in NSE. Simple random sampling was then used to obtain sample size from each category of investors operating in NSE. In data collection, study utilized disclosures in annual reports of firms and questionnaires comprising of structured questions which were administered to investors in each firm that participated in the study. In analyzing responses the Statistical Package for Social Sciences (SPSS) version 22 was used to present descriptive statistics, such as percentages, frequency distributions, measures of central tendencies, measures of variations and graphical expressions. To achieve above objectives, the study used both descriptive and inferential statistics so that to provide an insight into corporate characteristics of firms in the sample between hedgers and non- hedgers using both parametric and non-parametric test (Pearson correlation coefficient). In multivariate analysis, multi linear regression model was used in explaining decision to hedge corporate risk by testing of variables based on influence of financial determinants on corporate hedging presented in literature review. The results indicated that four of the variables, firm leverage, firm size, managerial risk aversion and foreign exchange have a positive and significant effect on corporate hedging. Firm liquidity had a weak positive correlation with corporate hedging of listed companies on the NSE. The study results support the view that financial determinants of listed firms in NSE have a significant influence on corporate hedging. The findings of this study need to be further developed in future research. On the one hand, research could focus on identifying other practical financial determinants on corporate hedging such as substitute for hedging. The study recommended that the policy makers should develop a well-organized exchange traded derivative market in Kenya for the benefit of financially constrained firms with highly variable cash flows and foreign sales. The study also highlighted effective usage of derivative instruments will enable corporations to define their hedging policies that are compatible with firm’s internal investment and financing policies. Therefore, properly planned and implemented investment, financing and hedging policies, will not only facilitate firms in achieving their primary goal of shareholders’ wealth maximization, but may also enhance economic stability.