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 qualitative
methods, 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.