Effects of Exchange Rate Determinants on Financial Performance of Multinational Companies

Abstract

Foreign exchange is one of the macroeconomic variables which affect the financial performance of firms. Fluctuations in the foreign exchange rate have an effect on the operating cashflows, investment decisions, profits, sales and a firm’s market value. Foreign exchange rate level is determined by various factors which include the balance of payment, terms of trade, inflation and government borrowing. Given the importance of multinational firms to the economy of Kenya, it is crucial to determine the effect of determinants of foreign exchange on their performance. The objective of the study was to determine the effect foreign exchange determinants on the financial performance of multinational companies in Kenya. The independent variables included balance of payment, government debt, terms of trade and inflation. Measurement of financial performance was done using return on equity and return on assets. The study was anchored by the balance of payments theory, Keynesian theory of public debt, theory of international trade and the quantity theory of money. The study sampled four multinational companies operating in the nation of Kenya. The period covered by the study was 2002-2017. Data collected for the study was from both the central bank publications and financial statements of multinational companies. Study data was evaluated using panel data. The fixed effects model was used for the study. The study established that the balance of payments had a negative as well as statistically significant impact on return on assets. The study also established that government debt had a positive and significant effect on return on assets. Terms of trade and inflation were found to have positive but statistically insignificant effects on return on assets. The balance of payment and inflation had a negative and statistically significant effect on the return on equity. The terms of trade was found to have a positive but statistically insignificant effect on the return on equity. Government debt had a positive and statistically significant effect on return on equity.