Effect of Risk Management Practices on the Financial Performance of Agricultural Companies Listed at the Nairobi Securities Exchange

Abstract

The purpose of the study was to establish the effect of risk management practices on financial performance of listed agricultural companies at the NSE. The study was based on Agency Theory, Risk Management Theory, and Contingency Theory. The study adopted descriptive research design as it entailed observing and describing occurrences without altering the qualities that were already there. Secondary data was collected from all the 7 listed agricultural companies for the period 2012-2021. The data collected was used to determine financial performance that was measured by the use of ROA. Data for operational risks was collected to calculate the operating expense ratio, financial risk was determined by solvency risk, assessment risk was determined by profit budget variance, Reputational risk that was calculated by percentage change in revenue and size that was determined by total assets. The study adopted the use of multiple regression analysis to determine the effect of risk managemengt practices on performnce. However, the study first undertook descriptive statistics that described each variable to determine the distribution as well as the mean standard deviation, kurtosis and skewness of each study variable. It provided an indication of the distribution of the study data. Correlation analysis was also undertaken where Pearson’s correlation was undertaken to determine the correlation between the independent and the dependent variables. The study found that there was a positive correlations between the independnet variables and the dependnet variable. All the correlations were weak and insignificnat except the correlation between financial risk and performance that had significant positive correlation. The multiple regression analysis that was undertaken after conducting diagnostic tests and transforming the values by standardizing the values for the study variables indicated that the coefficient of determination (R Squared) was able to predict changes in the dependent variable to a tune of 35.1%. The adjusted R squared was however lower than R squared indicating that some components of the model did not contribute significantly to the model. The F test undertaken had a p-value of less than 0.05 that meant that the null hypothesis was rejected and the study concluded that there was significant effect of risk management practices on firm performance of agricultural companies listed at the NSE. The regression coefficient indicated that all the independent variables had insignificant effect on performace apart from financial risk that indicated that increasing solvency ratio by one unit would lead to increase in financial performance to an extent of 0.57%.