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

Abstract

Several empirical studies that have examined the effect of riskmanagement on firm ' s value but the findings are contradictory. Somestudies have found a positive effect while others report a negativeeffect. Yet, others do not find any effect at all. Therefore, the objectiveof this study is to contribute to this ongoing debate by applying Systemstheory and systems thing to examine the effect of risk managementprocess on the value of investment firms in Kenya.Using a descriptive research design, the study surveyed 26investment firms at the Nairobi Securities Exchange to illuminate thenexus between risk management and firm value. The results showedthat risk identification tools such as audit, examination of employeeexperience, SWOT analysis, interviews, focus groups, judgment, andprocess analysis have a significant influence on firm ' s performance.However, SWOT analysis and judgment have a statistically strongand negative influence on firm ' s performance. The results alsoindicated 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 prioritizationhas a statistically strong and negative influence on firm ' s performance.The results also showed that use of quantitative methods and riskprioritization has no significant effect on firm ' s performance. Thissuggests that risk prioritization either has no effect or has a negativeeffect on firm ' s performance. The analysis further showed that riskmonitoring has no statistically significant effect on financialperformance. The organization of risk management has a statisticallypositive significant effect on financial performance. This is achievedby linking risk management and strategic objectives. The resultsfurther demonstrated that risk management tools have no statisticallysignificant relationship with financial performance. Analysis of theeffect of responsibility for risk management revealed that the role ofthe Board of Directors, the Director of Finance, the Internal Auditor,the Risk Manager and all staff have a statistically significantrelationship with financial performance.This relationship is the strongest when all staff members in thefirm are involved in risk management but negative when only theDirector of Finance is involved. Overall, the process of riskmanagement has a statistically significant relationship with financialperformance. Specifically, risk identification (especially the role ofthe Risk manager and the performance of the SWOT Analysis) andrisk analysis as well as assessment (especially evaluation of existingcontrols and risk management responses) significantly affect the firm ' sfinancial performance. This relationship is the strongest and negativewhen SWOT analysis is applied in risk management.