EFFECT OF FINANCIAL RISK ON SHAREHOLDERS' WEALTH OF COMMERCIAL BANKS LISTED AT NAIROBI SECURITIES EXCHANGE, KENYA

Abstract

Shareholders' wealth is among critical decisions in a firm because it has a bearing on overall investor perception and firm value. There has been concern about the declining value of shareholders' wealth among commercial banks listed at the Nairobi Security Exchange (NSE). Previous studies have linked financial risk to shareholders' wealth. The researchers, however, disagree on the magnitude and direction of the effect. The main objective of the research was to determine the effect of financial risk on shareholders' wealth of commercial banks listed at Nairobi Securities Exchange. The study's specific objectives were to establish the effect of credit risk, liquidity risk, foreign exchange risk, and interest risk on shareholders' wealth. Commercial banks were chosen since they are required by Capital Market Authority to disclose all their financial statements to the public. This study was anchored on Modigliani and Miller Theory, Capital Asset Pricing Model, Financial Distress Theory, and Modern Portfolio Theory. A descriptive research design was adopted. The target population of this study was eleven commercial banks that had been constantly listed at the Nairobi Securities Exchange from 2013 to 2019. A census was conducted to collect data from the eleven banks due to the small size of the population. Data was obtained from published financial statements of all the eleven commercial banks listed at the NSE and the Banking survey publications for seven years from 2013 to 2019. These banks were consistently listed for this period. A checklist was used to guide in collecting secondary data. Data was analyzed using descriptive and inferential statistics with the help of Microsoft Excel and SPSS version 25.0. Multiple regression analysis was used to establish the relationship between variables, and t-statistic at a 5% significance level was employed to test the hypothesis. The overall significance was tested using the F-test. The findings of the study were presented in the form of tables and equations. The study established that credit risk had a significant adverse effect on shareholders' wealth with a regression coefficient of -215.945 and a p-value of 0.039. Further, it was found that liquidity risk and foreign exchange risk had a negative and positive effect with a regression coefficient of -0.556 and 3.764 and p-values of 0.023 and 0.035, respectively. The interaction between operational efficiency and financial risk had a regression coefficient of -17.772 and a p-value of 0.003. The study concluded that credit risk, liquidity risk, and foreign exchange risk had a significant effect on shareholders wealth of Commercial banks listed at the NSE and recommended that Managers should come up with stringent policies of regulating loans, and they can also demand collateral before issuing loans to curb credit risk. Banks should come up with a strategy of holding more liquid assets than liabilities. Banks should come up with ways of diversifying their resources to minimize risk and maximize returns. Commercial banks should emphasize refining their operational efficiency to reduce financial risk and mprove shareholders' wealth. Operational efficiency was found to alter the relationship between financial risk and shareholders' wealth. This studywill be significant to the Central Bank of Kenya and the government while formulating banking policies and regulations and guiding banks in developing their specific policies of minimizing financial risk. It will also provide further knowledge in the field of Commercial banks' financial risks.