EFFECT OF USAGE OF DERIVATIVE FINANCIAL INSTRUMENTS ON FINANCIAL PERFORMANCE OF NON-FINANCIAL FIRMS
DOI:
https://doi.org/10.47604/ijfa.724Keywords:
Derivative Financial Instruments, Financial Performance, Non-Financial Firms and Nairobi Securities ExchangeAbstract
Purpose: The purpose of this study is to examine the effect of derivative financial instrument utilization on the financial performance of non-financial firms recorded at the Nairobi Securities Exchange. The objectives that guided this study are to assess the impact of use of derivatives in risk management on financial performance of non-financial firms listed on the Nairobi Securities Exchange (NSE).
Methodology: The study embraced the regression model. A census of all the 47 non-financial firms listed at the NSE as at December 2017 constituted the target population where only 11 listed non-financial firms were financial derivative instruments users. The study utilized qualitative and quantitative research techniques especially the utilization of descriptive research design. The data for this study was collected using questionnaires, audited financial statements and annual reports of individual firms for the multi year time frame covering 2013-2017 (the two years comprehensive).
Results: The study discovered that greater part of the firms (66.67%) utilizes Forwards, 22.22% utilize Swaps and 11.11% utilize Futures and Options for financial risk management. From the study the outcomes were as per the following: presence of debt in the financial structure of the non-financial firms listed at the NSE does not influence its financial performance as estimated by return on assets (ROA), use of derivatives in efficiency in trading influences the financial performance of the firms, use of derivatives in price stabilization is statistically significant and utilization of derivatives in price discovery does not influence the financial performance of the firms. By and large, the performance of the recorded non-financial firms at the NSE amid the time of study was 8.13 with a standard deviation of 10.67.
Unique contribution to Theory, Practice and Policy: The study recommended that firms should combine both debt and equity in their financial structure. It is therefore incumbent on firms' managers and financial advisors to continuously study the market and advice on the appropriateness of the proportions of the various sources of finance based on market circumstances at any given time.
Downloads
References
Aggarwal, R. (1988). "Stock Index Futures and Cash Market Volatility." Review of Future Markets.
Ahmed, N. & Harris, B. (2012). "Factors for Using Derivatives: Evidence from Malaysian Non- Financial Companies." Research Journal of Finance and Accounting.
Akun, F. (2016). "The effect of financial derivatives on the financial performance of commercial banks in Kenya." Unpublished MBA Thesis, University of Nairobi.
Allayannis, G., & Weston, J. (2001). "The use of foreign currency derivatives and firm market value." Review of Financial Studies.
Ammon, N. (1998). "Why Hedge? - A Critical Review of Theory and Empirical Evidence." ZEW Discussion Papers.
Bartram, S.M., Brown, G.W. and Fehle, F.R. (2009). "International Evidence on Financial Derivatives Usage." Financial Management.
Bessembinder, Hendrik. 1991. "Forward Contracts and Firm Value: Investment Incentive and Contracting Effects." Journal of Financial & Quantitative Analysis.
Bologna, P. & Cavallo, L. (2002). "Does the Introduction of Stock Index Futures Effectively Reduce Stock Market Volatility? Does the Introduction of Stock Index Futures Effectively Reduce Stock Market Volatility? Is the Futures Effect Immediate? Evidence from the Italian Stock Exchange using GARCH." Applied Financial Economics.
Bowen E., Kaburu M., Mwambia F. (2017). "Factors influencing growth of derivatives market in Kenya: A case study of Nairobi Securities Exchange." The Strategic Journal of Business & Change Management.
Brorsen, B.W. (1991). "Futures Trading, Transaction Costs, and Stock Market Volatility." Journal of Futures Markets.
CFA, (2009). "Derivatives and alternative investments, program curriculum level 1 vol.6" Pearson custom publishing.
Chege R.W, (2016). "Relationship between hedging strategies and financial performance of non-financial firms listed at the Nairobi Securities Exchange," MSc Finance Thesis, University of Nairobi.
Correia, C., Holman, G., & Jahreskog, A. (2012). "The corporate use of derivatives: a survey of South Africa's large listed non-financial firms," South African Journal of Accounting Research.
Danbee Park & Joocheol Kim (2015), "Financial Derivatives Usage and Monetary Policy Transmission: Evidence from Korean Firm-level Data," Global Economic Review: Perspectives on East Asian Economies and Industries.
Deutsche Börse Group (2008). "The global derivatives market, White Paper" - An Introduction
El-Masry, A. (2006). "Derivatives use and risk management practices by UK non-financial companies." Managerial Finance.
Ersen, P. & Karagozoglu, A. (2003), "Introduction of derivatives exchanges in emerging markets," Hofstra University working paper.
Figlewski, S. (1987). "The interaction between derivative securities on financial instruments and the underlying cash markets: an overview." Journal of Accounting, Auditing and Finance.
Froot, K., Scharfstein, D., & Stein, J. (1993). "Risk Management: Coordinating Corporate Investment and Financing Policies." Journal of Finance.
Gitogo J. Karanja, J. & Kasimolo, T. (2013). "The Relationship between derivatives and the financial performance of Commercial Banks In Kenya," International Journal of Social Sciences and Entrepreneurship.
Harris, L. (1989). "S & P500 Cash Stock Price Volatilities." Journal of Finance.
Hawkesby, C. (1999). "A primer on derivatives markets." Reserve Bank of New Zealand: Bulletin.
Hentschel, L., & Kothari, S. (2001). "Are corporations reducing or taking risks with derivatives." Journal of Financial and Quantitative Analysis.
Howells, P. & Bain, K. (2002). "The economics of money, banking and finance" (2nd Ed.). Essex, England: Pearson Education Limited.
Jensen, M.C., & Meckling, W.H. (1976). "Theory of the firm: Managerial behavior, agency costs and capital structure." Journal of Financial Economics
Jin Y, Jorion P. (2006). "Firm value and hedging: Evidence from US oil and gas producers." The Journal of Finance.
Judge, A.P. (2006). "Why and how UK firms hedge." European Financial Management.
Kavussanos, M.G., Visvikis, I.D., & Alexakis, P.D (2008). "The lead-lag relationship between cash and stock index."
Lee, S. B. & Ohk, K. Y. (1992). "Stock index futures listing and structural change in time-varying volatility," The Journal of Futures Markets.
Lenee T.L & J.Oki (2017), "Financial Derivatives and Firm Performance: Empirical Evidence from Financial and Non-financial Firms." British Journal of Economics, Management & Trade.
Lockwood, L. J., & Linn, S. C. (1990). "An Examination of Stock Market Return Volatility During Overnight and Intraday Periods 1964-1989," The Journal of Finance..
Malkiel, B.G. (1986). "Why markets are working better." Wall Street Journal (Eastern Edition). New York.
Maniar, H.M. (2000). "Impact of Derivatives Trading on the underlying Securities; A Case study on National Stock Exchange of India (NSE) of India," At International conference "World Congress on Engineering" London, U.K.
Mbungu, P.K (2013). "An investigation into factors influencing the development of derivatives markets in Kenya." Unpublished MBA Thesis. Kenyatta University
MFA, (2008). "Structure and Concentration of Organized Derivatives Trade, 1994-2006"
Mian, S. L. (1996). "Evidence on corporate hedging policy." Journal of Financial and Quantitative Analysis.
Miller MH, Modigliani F. "The cost of capital, corporate finance and the theory of investment." American Economic Review.
Miriri D. (2016), "Kenya's NSE signs up six banks to Clear Derivatives," Reuters, US Edition
Mutende J. (2013), "Factors Hindering Derivatives at the Nairobi Securities Exchange," AIBUMA Conference.
Mwangi, Muturi & Ngumi (2016), "Relationship between Financial Structure and Financial Performance of Firms Listed at East Africa Securities Exchanges," Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)
Ngugi, N., Njagi G. M, & Kimani E. M. (2013)." Factors influencing development of financial derivatives markets: a survey of listed companies in Kenya". Global Advanced Research Journal of Management and Business Studies.
Njoroge, N, Matumo M. & Maina, K. (2013). "Factors influencing development of financial derivatives markets," Global Advanced Research Journal of Management and Business.
NZFOX (2008). "Overview of derivatives." Retrieved from www.nzx.com
Nzuki, V.G. (2010). "Managing Price Risk Using Futures: Case of Oil Companies in Kenya." Unpublished Master Thesis, Kenyatta University.
Omagwa, J. (2005). "Foreign exchange risk management practices by foreign owned commercial banks in Kenya." Unpublished MBA Research Project, University of Nairobi.
Otsyula M. (2014). "Challenges facing the use of financial derivatives in hedging interest rate risk by commercial banks in Kenya," International Scientific Research Journal in Business and Management.
Pilar C. & Rafael S. (2002). "Does derivative trading destabilize the underlying assets? Evidence from the Spanish stock market," Applied Economics Letters.
Pok, W.C. & Poshakwale, S. (2004). "The Impact of the introduction of futures contracts on the spot market volatility: The case of Kuala Lumpur Stock Exchange", Applied Financial Economics.
Rawlings, J. O., Pantule, S. G., & Dickey, D. A. (2001). "Applied Regression Analysis: A Research Tool." 2ndEd.Springer
Silber, W.L, 1981. "Innovation, Competition and New Contract Design in Futures Markets," Journal of Futures Markets.
Skinner, D.J. (1989). "Options markets and stock return volatility." Journal of Financial Economics.
Ubindi, B. S. (2006). "A survey of foreign exchange risk management practices by forex bureaus in Kenya," Doctoral Presentation.
Vashishtha, A. & Kumar, S. (2010), "Development of Financial Derivatives Market in India- A Case Study." International Research Journal of Finance and Economics.
Downloads
Published
How to Cite
Issue
Section
License
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution (CC-BY) 4.0 License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this journal.
