EFFECT OF USAGE OF DERIVATIVE FINANCIAL INSTRUMENTS ON FINANCIAL PERFORMANCE OF NON-FINANCIAL FIRMS

Abstract

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.