The effect of foreign exchange risk management on the value of firms listed at the Nairobi Securities Exchange

Abstract

This study investigates the effect of foreign exchange risk management on firm value with specific reference to those listed at the NSE. With the world becoming a global village more firms are being exposed to foreign exchange risk requiring them to seek ways of shielding themselves against the vice. This being a descriptive study that sought to establish the effect of foreign exchange risk management on the value of a company, the research design used is cross-sectional design. Data was gathered for a period of five years from the year 2008 to the year 2012 based on twenty nonfinancial companies listed at the NSE. These are companies that are either derivative user’s, are exporting firms, have foreign denominated debts or have subsidiaries abroad. Research findings on the topics have yielded different results leaving a gap as to whether hedging foreign exchange risk really does affect firm value. To test this, Tobin’s Q model has been employed in calculating firm value and the study has found that hedging foreign exchange risk does not significantly contribute to firm value. The results add new evidence to the current literature that have reported conflicting empirical findings from prior research. To better manage risks, firms should therefore understand the risks they are exposed to by developing a risk profile. This will enable firms take on the various options of either letting the risk pass through, protecting themselves by using the hedging instruments or intentionally increasing exposure to some of the risks especially where managing the risk is insignificant.