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

Tanui Livingstone Kiptoo

Jomo Kenyatta University of Agriculture and Technology (JKUAT), Kenya

Dr. John Karanja Ngugi, PhD.

Jomo Kenyatta University of Agriculture and Technology (JKUAT), Kenya

CITATION: Tanui, L. K. & Ngugi, J. K. (2019). Determinants of Corporate Hedging Practices used by Companies Listed in Nairobi Security Exchange. International Journal of Economics and Finance. Vol. 8 (1) pp 1 – 25.

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. 21) 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.

Key Words: Corporate Hedging, long-term debt ratio, growth option, liquidity ratio, cash flow volatility, Nairobi Securities Exchange.

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