The Effects of Exchange Rate Movements on Corporate Profitability of Firms Listed at the Nairobi Securities Exchange

Abstract

Empirical studies have described different results on the kind of association that exists between exchange rate and financial performance. The intent of this study was to identify variables that impact on the level of corporate profitability of firms listed at the NSE and also to find out the level of impact of these variables on corporate profitability. Corporate profitability was the dependent variable of the study and it was measured using ROA (Jensen and Meckling, 1996). The independent variables of the study were interest rate, current account balance and debt. Interest rate was measured using natural logarithm of finance cost (Richardson and Welker, 2001). Current account balance was measured using natural logarithm of foreign gain (Jumani, 2014) and debt was measured using natural logarithm of external borrowings. Data on values of these variables were obtained from annual reports of listed firms at the NSE downloaded from every listed firm website. A mean value of the last five years was calculated for each variable of the study. The study was census in nature which involved the study of all the 65 listed firms at the NSE as at June 2017. The statistical investigations carried out revealed that profitability has positive association with current account balance while interest rate and debt have negative relationship with profitability. These kinds of associations were however noted to be insignificant so as to cause significant positive or adverse changes in level of firm’s profitability. The study concluded that corporate profitability was negatively affected by an increase in interest rate and positively affected by an increase in current account balance; also increase in debt was found to negatively affect profitability.