The Effect of Exchange Rate Translation Exposure on the Financial Performance of Companies Listed at the Nairobi Securities Exchange

Abstract

This study was a descriptive survey of the companies that are listed at the Nairobi Securities Exchange on the effects of exchange rate translation exposure. It is one of the three types of currency exposures; the other two being transaction exposure and economic exposure. Exchange rate exposure is the risk of loss due to fluctuations in currency values on a company’s or business’s operations. Translation exposure is the risk that a company's equities, assets, liabilities or income will change in value as a result of exchange rate changes. This occurs when a firm denominates a portion of its equities, assets, liabilities or income in a foreign currency. The regression model for the study was: Y= β0+ β1X1+ β2X2+ β3X3+ E where: Y= Financial Performance (Dependent variable), β0 = Constant term, X1 = Translation exposure, X2 = Firm size, X3 = Company’s sector of listing at the NSE and E = Error term. The study also tested the hypothesis that financial performance is not affected by translation exposure against the hypothesis that financial performance is affected by translation exposure. The study utilized secondary data obtained from the listed companies’ financial statements. One of the findings of the study was that very many companies are exposed negatively to translation exposure and that no company has been positively exposed for two consecutive years. The study also found that financial performance is affected by the three of the five variables under study which was indicative that translation exposure is a result of deliberate financial policies that are unique to the companies. Regression results led to the conclusion that the null hypothesis be accepted because regression results showed that financial performance is not significantly affected by translation exposure. Earnings per share were also found not to significantly affect financial performance.