Effect of Financial Risk on Performance of Transport Firms in Mombasa County

Abstract

Traditionally, finance function has been seen in terms of financial reporting and control, a modern approach of finance is to consider the financial function in terms of financial policy and financial decision making. The purpose of this study was to determine the effects of financial risks on performance of transport firms in Mombasa County. Specific objective of this study were to analyze effect of credit risk, liquidity risk, market risk and foreign exchange risk. The scope of the study was to analyze the effects of financial risks on transport firms in Mombasa. This research was based on the theories of Tobin’s separation theory, Capital Market Pricing Theory (CAPM), Stakeholder’s Theory and the Modigliani and Miller’s Irrelevance of Risk theory to ascertain if their assumptions best explain the relationship between financial risks and performance of transport firms. The research design adopted by this study was mixed design (Triangulation) that employed both qualitative and quantitative design. Primary data was acquired through administering of questionnaires to a sample of senior managers within the transport firms. Secondary data was extracted from Kenya Transporters Association (KTA) database, Mombasa County Transport Department, National Transport Service Authority (NTSA) database, Transport journals and other publications. Target population for this study was 2,013 logistics and long distance passenger bus carriers firms senior managers and a sample size of the study was 172 transport firms’ senior managers sampled through stratified sampling. Data was analyzed using Statistical Packages for Social Sciences (SPSS) version 23 to present descriptive statistics such as percentages, frequency distributions, measures of central tendencies, and measures of variations. Data analysis and interpretation was based on descriptive statistics and measures of dispersion as well as inferential statistics; bivariate and multivariate regression analysis, Pearson correlation, factor analysis and analysis of variance were employed. Multi linear regression model was used in explaining the effects of financial risks on performance of transport firms in Mombasa. The results of the study indicate that financial risks (credit risk, liquidity risk, market risk and foreign exchange risk) had significant and positive effect on the performance (in Return on Investment and Return on Assets) of transport firms. The study recommends transport firms should establish appropriate credit risk environment; Firms should operate under sound credit granting process; maintain minimum operating liquidity level in order to maintain a comfortable cushion to meet cash flow needs which is paramount to financial performance of transport firms; Firm should address the unexpected (Market risk) loss at certain confidence level to ensure solvency and stability of transport firms just like Financial Institutions in case of market shocks; Managers should measure the degree and magnitude of transaction size, hedge period and volatility of the currency and their effect on performance of firms.