DETERMINANTS OF CORPORATE HEDGING PRACTICES USED BY COMPANIES LISTED IN NAIROBI SECURITY EXCHANGE

KIPTOO Tanui Livingstone, KARANJA Ngugi

Abstract


Abstract: Hedging can reduce underinvestment costs since it reduces the probability of financial
distress by shielding future stream of cash flows from the changes in the exchange rates.
Variability in cash flows will result in variability in the amount of investment. A decrease in
planned investment means that the firm is foregoing positive net present value projects and since
it has insufficient internal funds the firm is forced to raise costly external finance. Shareholders
in Kenyan firms are losing billions of shillings each year due to directors’ failure to shop for
appropriate hedging instruments. The widespread use of derivatives for hedging is well
documented in the corporate hedging literature. Thus, why firms hedge and whether hedging
creates value are important questions. However, none of these studies was conducted in Kenya
on the determinants of corporate hedging practices, research gap. This study aimed at
investigating on the determinants of corporate hedging practices used by companies listed in
Nairobi Security Exchange. The specific objectives of this study were to establish the effects of
long-term debt ratio, growth option, liquidity ratio and cash flow volatility on the hedging
practices used by companies listed in Nairobi Security Exchange. This study used a descriptive
design. The target population of this study was therefore 300. This study used purposive
sampling to select on the financial managers. The sample size of this study was therefore 60
respondents which is 20% of the target population. The study collected both primary and
secondary data. Primary data was collected using questionnaires. On the other hand secondary
data was collected from newspapers, published books, journals and magazines as well as other
sources such as the companies’ prospectus. Primary data was collected using questionnaires that
were distributed to the respective respondents. Quantitative data collected was analyzed using
descriptive statistics by the help of SPSS (V. 17.0) and presented through frequencies,
percentages, means and standard deviations. Data was then presented in tables, figures and
charts. In addition, multiple regression was used to establish the relationship between the
dependent and the independent variables. This study established that there is a positive
relationship between hedging practices used by companies listed in Nairobi Security Exchange
and liquidity ratio, growth option and cash volatility. The study also found that long-term debt
negatively influences hedging practices used by companies listed in Nairobi Security Exchange.
This study established that most of the companies in Nairobi Security Exchange had experienced
liquidity problems in the last 5 years. In addition, the study found that most of the companies in
this study had not used hedging practices in the past. This study therefore recommends that
companies listed in NSE should make use of hedging practices whenever they are facing
liquidity problems.


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References


References

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