The Effect of Selected Macroeconomic Variables on the Financial Performance of Firms Listed at Nairobi Securities Exchange

Abstract

The purpose of this study was to determine the effect of selected macroeconomic variable on financial performance of firms listed at NSE in Kenya. Studies that have been done previously on effect of macroeconomic variables on financial performance include commercial banks, microfinance Institutions, Non-Bank institutions, emerging economies (BRIC), Aviation sector etc. The measure for financial performance used was ROA measured against the macroeconomic variables; inflation rate, foreign exchange, GDP growth rate, interest rate and money supply. The study used annual secondary data on the macroeconomic variables and ROA figures spanning over a ten-year period between 2006-2015. The data on inflation (CPI) and GDP per capita was obtained from KNBS. Data on money supply (M3) was obtained from IMF and exchange rate (USD and Kenya Shilling) was obtained from the CBK. The data on Lending Interest Rates and ROA of the individual companies will be obtained from published financial statements. The data was analyzed using SPSS version 20. Given that the study model is a multivariate, the study used Vector Auto Regression Model (VAR) for multivariate time series to analyze the relationship between the selected macro-economic factors and the financial performance of companies listed at NSE. The results were analyzed using descriptive statistics and the relationships between the variables were investigated using correlation analysis, measures of central tendency and the trends analysis. The regression analysis obtained Coefficient of determination (R), Correlation Coefficient (R-Square), P-Value and F-test statistics which were; 0.915, 0.838, 0.026 and 4.137 respectively. Since R was positive (0.915) the relationship between the performance and the macro-economic variables was positive. Since, R-Square was way above 0.75 as it was (0.838) the relationship between NSE performances as measured by ROA is very strong. However, the study results established that the relationship between exchange rate and performance had a negative relationship. This study concludes that there is a strong positive relationship between the selected macro-economic variables (interest rates, inflation, money supply, and GDP per capita) together and performance of listed companies at NSE. Also, this study concludes that the relationship between exchange rate and performance is inversely related and significant. Further, the study concludes that the Money Supply, GDP, and interest have a weak and insignificant relationship with performance of firms listed at NSE. The study recommends that the central bank of Kenya and other regulators should plan in advance and influence the macro-economic variables such as inflation, money supply on the right direction.