FINANCIAL RISK HEDGING, CAPITAL MARKET AUTHORITY REGULATIONS, AND SHARE PRICE VOLATILITY OF NAIROBI SECURITIES EXCHANGE LISTED FIRMS IN KENYA

Abstract

In an environment characterized by economic uncertainty, fluctuating exchange rates, and liquidity constraints, effective risk management practices have become increasingly important for maintaining firm value and investor confidence. While the Kenyan government has recorded steady economic development, the share prices of NSE-listed firms have continued to fluctuate. The persistent phenomenon of share price volatility reflects investor expectations, market information, and financial realities. Excessive volatility disrupts the proper functioning of the financial system and, beyond a certain threshold, increases financial risk. This study investigates financial risk hedging, Capital Market Authority regulations and share price volatility of Nairobi Securities Exchange listed firms in Kenya. The study’s specific objectives were to examine the effects of liquidity risk hedging, exchange rate risk, market risk hedging, and credit risk hedging on the share price volatility of firms listed on the NSE. Capital Markets Authority (CMA) regulations were adopted as the moderating variable. The independent variables were credit risk hedging, liquidity risk hedging, market risk hedging, and exchange risk hedging which were measured using leverage ratio, acid-test ratio, Capital Asset Pricing Model (CAPM), and Value at Risk (VaR) models respectively, while share price volatility was calculated based on the standard deviation of share prices. CMA regulations were measured using the CMA NSE Shareholding Regulations, 2016. The study was anchored on four theories: Merton’s model, Modern Portfolio Theory, Liquidity Preference Theory, and Purchasing Power Parity Theory. The study reviewed various studies to establish the relationship between the financial risk hedging and share price volatility. A positivist research philosophy and a mixed research design and a guided the investigation. The study targeted a population of fifty-four (54) companies listed on the NSE between 2013 and 2022. The study employed random-effects regression models to analyze the relationship between financial risk hedging and share price volatility. Primary data were collected for the moderating variable, while secondary data were used for both the dependent and independent variables. A questionnaire was used to collect primary data, and a data collection sheet was used for secondary data. A pilot study was conducted on 13 unlisted firms. Diagnostic tests were performed to determine whether to apply the fixed-effects or random-effects model. The results were presented using graphs, tables, and figures. The findings reveal a statistically significant negative relationship between financial risk hedging and share price volatility, indicating that firms actively engaging in financial risk hedging tend to experience more stable stock prices. Specifically, liquidity risk hedging and credit risk hedging showed a significant negative effect on share price volatility, while market risk hedging and exchange rate risk hedging had a statistically significant positive effect. The findings indicate that CMA regulations have a moderating effect on the relationship between liquidity risk hedging and share price volatility of NSE-listed firms. The study recommends highly leveraged firms to implement diversified credit risk hedging strategies, such as credit insurance and strong credit scoring systems, and urges all firms to maintain an acid test ratio of at least 1.0 to ensure they can meet short-term obligations without depending on inventory. The firms with high beta coefficients under CAPM which indicates strong sensitivity to market movements should adopt formal market risk hedging strategies.