Financial Risk and Financial Performance of Commercial State Corporations in Kenya
Damballa Jacob Diid *
Department of Accounting and Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya.
Farida Abdul
Department of Accounting and Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya.
*Author to whom correspondence should be addressed.
Abstract
Commercial state corporations in Kenya continue to experience financial performance challenges, reflected in persistent weak and negative returns on assets across several entities. This study examined the effect of financial risk on the financial performance of commercial state-owned enterprises in Kenya over the period 2019-2024. Specifically, it assessed the influence of default risk, interest rate risk, foreign exchange rate risk, and liquidity risk on financial performance. The study adopted an explanatory research design and used secondary panel data obtained from audited financial statements. Although the target population comprised 46 entities, the analysis included 42 corporations with complete financial information, generating 252 firm-year observations. Financial performance was measured using return on assets (ROA), while financial risks were operationalised using the debt-to-asset ratio, interest expense ratio, foreign exchange gain or loss ratio, and current ratio. Panel regression analysis was conducted after diagnostic tests assessed multicollinearity, normality, heteroscedasticity, autocorrelation, stationarity, and model specification. The findings revealed that default risk had a negative and statistically significant effect on financial performance (β = -4.497, p < 0.001), indicating that increased debt exposure reduces profitability among commercial state corporations. Liquidity risk had a positive and significant effect on ROA (β = 0.204, p = 0.033), suggesting that effective liquidity management supports operational efficiency and financial outcomes. Interest rate risk exhibited a positive and statistically significant relationship with financial performance (β = 0.002, p = 0.008), while foreign exchange rate risk had a positive but statistically insignificant effect (β = 0.015, p = 0.824). The regression model explained 71.01% of the variations in financial performance (R² = 0.7101). The study concludes that financial risk management, particularly prudent debt management and effective liquidity planning, is critical for improving the sustainability and performance of commercial state-owned enterprises in Kenya.
Keywords: Financial risk, default risk, liquidity risk, interest rate risk, foreign exchange risk, financial performance, return on assets, commercial state corporations, state-owned enterprises, Kenya