Effect of Financial Risk on Performance of Listed Energy and Petroleum Firms at the Nairobi Securities Exchange

Abstract

The objective of this study was to examine the effect of financial risk on performance of listed energy and petroleum firms at the Nairobi Securities Exchange. Target population comprised four companies at the NSE. Descriptive research design was adopted and census survey was conducted using data from the year 2013 to 2022 since the size of the target population was small. Published annual reports of the subject firms provided data. Analysis facilitated using statistical package for social scientists. Regression analysis found R = 0.556 inferring positive relationship of financial risk and performance. Adjusted R-squared of 0.230 implied 23% variation in performance was instigated by variations in credit risk, market risk, liquidity risk and size of a firm. Regression coefficients revealed liquidity risk has a significant effect on performance of energy and petroleum companies (p = 0.000 <0.05). Similarly, credit risk was found to have a significant effect on performance of listed energy and petroleum companies (p = 0.037 < 0.05). Also results showed size of a firm has substantial positive effect on performance of energy and petroleum companies (p = 0.023 < 0.05). However, market risk have an insignificant effect on performance of energy and petroleum companies (p=0.121>0.05).It was recommended that energy and petroleum companies should increase exposure to credit risk and liquidity risk while increasing firm size. However they should reduce their exposure to market risk. This would result in improving financial performance. Financial risk managers should attempt to identify optimal exposures to these types of financial risk in order to optimize financial performance. Investors in this sector at the NSE ought to consider the firms’ liquidity risk, credit risk and market risk exposure in selecting investment stock among the energy and petroleum companies. Further researchers may extend this research to different sector.