Effect of Unexpected Exchange Rate Movements on Value of Multinational Nonfinancial Companies Listed at Nairobi Securities Exchange

Abstract

The study investigates the effects of unexpected exchange rate movements on value of multinational nonfinancial companies listed at Nairobi securities exchange for period 2001-2016. Contemporaneous exchange rate changes and lagged exchange rate movements were used as control variables. The study adopted a two staged methodology. The first stage involved the determination of the foreign exchange exposure. At this point the REER is determined as the weighted average of the seven major currencies used by Kenya. The unexpected foreign exchange changes were determined using the ARIMA and GARCH model. The second stage of analysis involves a panel model where different aspects of foreign exchange exposure are regressed on firm value. The results indicated that unexpected exchange rate changes have a negative significant influence on the value of nonfinancial companies listed at the Nairobi Securities Exchange. The results of the study were inconclusive on the effects of lagged changes in exchange rates on firm value. The findings of the study reveal that unexpected exchange rate changes have a significant negative influence on firm value.