The Effects of Operating Foreign Exchange Exposure on Share Prices in Commercial and Services Firms at the Nairobi Securities Exchange

Abstract

Foreign exchange exposure is important in a multinational corporation as it influences working capital management decisions, since cash flow values are mainly affected by these exposures. These firms therefore need to be ready to address exposure issues once they arise. Another important aspect of foreign exchange exposure is that it could influence the share prices for MNCs whose shares are listed in stock markets. The objective of the study was to study the effect of foreign exchange exposure on the share prices of firms listed in the commercial and services sector at the NSE. The study was an event study, sampling four of the nine firms in the commercial and services sector at the bourse. Secondary data from the NSE was collected, and analysed through the use of t-tests, correlation and multivariate regression analysis. The overall findings confirm that share price movements reflect the available information in the market. The nature of the foreign exchange exposure information is negative but the extent varies across firms. The practical implications of these findings are on the management of the foreign exchange exposure by firms to reduce the negative influence of information about the exposure on share price movements. The correlation results showed that there are negative relationships between foreign exchange exposure and share prices at the NSE, though such relationships were observed to be either weak or very weak. The study revealed that a unit increase in foreign exchange exposure, exchange rate volatility, interest rate, inflation rate and return negatively affect the share prices of firm listed in the Nairobi securities Exchange, thus the study concludes that there is a negative relationship between foreign exchange exposure, exchange rate volatility, interest rate, inflation rate and return and share prices of firm listed in the Nairobi securities Exchange. The study revealed that a unit increase in domestic market portfolio would positively affect share prices, thus the study concludes that there is a positive relationship between domestic market portfolio and share prices of firm listed in the Nairobi securities exchanges. The study recommends that firms listed in the Nairobi Stock Exchange should explore avenues to enhance capacities within firms for managing foreign currency risk exposure. They should explore the route of continued education for those in workplaces through short term training that should be very practical oriented, this could involve professional organizations for finance specialists, bankers, accountants and consultants.