The Effect of Risk Management on Performance of Investment Firms in Kenya

Abstract

Several empirical studies that have examined the effect of risk management on firm’s value but the findings are contradictory. Some studies have found a positive effect while others report a negative effect. Yet, others do not find any effect at all. Therefore, the objective of this study is to contribute to this ongoing debate by applying Systems theory and systems thing to examine the effect of risk management process on the value of investment firms in Kenya. Using a descriptive research design, the study surveyed 26 investment firms at the Nairobi Securities Exchange to illuminate the nexus between risk management and firm value. The results showed that risk identification tools such as audit, examination of employee experience, SWOT analysis, interviews, focus groups, judgment, and process analysis have a significant influence on firm’s performance. However, SWOT analysis and judgment have a statistically strong and negative influence on firm’s performance. The results also indicated that risk analysis and assessment tools such as qualitativemethods, evaluation of existing controls, and risk prioritization have a significant influence on firm’s performance. However, risk prioritization has a statistically strong and negative influence on firm’s performance.The results also showed that use of quantitative methods and risk prioritization has no significant effect on firm’s performance. This suggests that risk prioritization either has no effect or has a negative effect on firm’s performance. The analysis further showed that risk monitoring has no statistically significant effect on financial performance. The organization of risk management has a statistically positive significant effect on financial performance. This is achieved by linking risk management and strategic objectives. The results further demonstrated that risk management tools have no statistically
significant relationship with financial performance. Analysis of the effect of responsibility for risk management revealed that the role of the Board of Directors, the Director of Finance, the Internal Auditor, the Risk Manager and all staff have a statistically significant relationship with financial performance. This relationship is the strongest when all staff members in the
firm are involved in risk management but negative when only the Director of Finance is involved. Overall, the process of risk
management has a statistically significant relationship with financial performance. Specifically, risk identification (especially the role of the Risk manager and the performance of the SWOT Analysis) and risk analysis as well as assessment (especially evaluation of existing controls and risk management responses) significantly affect the firm’s financial performance. This relationship is the strongest and negative when SWOT analysis is applied in risk management.