Effects of Foreign Exchange Risk on Firm Value of Commercial State Corporations in Kenya

Abstract

Foreign exchange risk constitutes one of the most common forms of risk that firms in the international arena encounter and, in recent years, the management of this risk has become one of the key factors in overall financial management. The risk helps investors determine appropriate expected returns from investment, firm value is thus affected by the risk a firm is exposed to since it affects the size of future cash flows. Appreciating foreign exchange risks and measuring firm value is a crucial step to better managing and improving the performance of firms. Companies that choose not to manage foreign exchange risk may be assuming that exchange rates will remain at their present levels or move in a direction that will be favourable to the company. The study sought to investigate the effects of foreign exchange risks on firm value for commercial state corporations in Kenya. The study applied a descriptive study that was aimed at establishing the effect of foreign exchange risk on the value of a firm, the research design used was cross-sectional design, which was a study in which data was gathered systematically over a period of time in order to answer a research question. The study targeted 55 commercial state corporations as per the Report of The Presidential Task force on Parastatals Reforms. Data was obtained from secondary sources such as the financial statements of the commercial state corporations under analysis. A multiple regression model was employed. A computer package SPSS (Statistical Package for the Social Sciences) version 22 was used to solve the multiple regression equation used in this study. From the regression model, the study found out that there were factors influencing the firm value of commercial state corporations in Kenya, which are foreign exchange risk, firm size, leverage, growth options and financial constraints. They influenced firm value of commercial state corporations in Kenya positively or negatively. The study found out that the intercept was 0.645 for all years. The five independent variables that were studied (Foreign Exchange risk, Firm size, Leverage, Growth Options and Financial constraints) explain a substantial 65.4% of firm value of commercial state corporations in Kenya as represented by adjusted R2 (0.654). The study therefore concludes that foreign exchange risk positively and significantly influences the firm value for commercial state corporations in Kenya.