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.
Publisher
University of Nairobi
Description
Masters