Effect Of Financial Risk On Financial Performance Of Five Star Hotels In Kenya

Abstract

Kenya’s hotel industry faces many challenges such as ttal revenue per available room in the country has been declining over the last five years. In spite of this, there is scarcity of empirical information on the same. This study therefore sought to investigate the effect of financial risk on the financial performance of five star hotels in Kenya. Specifically, the study examined the effect of liquidity risk on financial performance of the five star hotels in Kenya, determined the effect of solvency risk on financial performance of the five star hotels in Kenya, established the effect of interest rate risk on financial performance of the five star hotels in Kenya, determined the effect of exchange rate risk on financial performance of the five star hotels in Kenya. The study was guided by four theories: risk management theory, wreckers theory, liquidity preference theory and interest rate theory. The target population was all the 25 five star hotels in Kenya. The study employed a descriptive research design. Secondary data was extracted from financial statements (annual reports). Data processing and analysis was done using statistical software of STATA. Both descriptive and panel data regression were carried out. The study found that an increase in liquidity risk would cause financial performance of five star hotels in Kenya to decrease by (β=-0.3308, p<0.05), solvency risk has negative significant influence (β=-2.4744, p<0.05) on financial performance of five star hotels in Kenya. The study also found that a unit increase in interest rate risk would cause a decrease (β=-1.6431, p<0.05) in financial performance of five star hotels in Kenya and that a unit increase in foreign exchange rate risk will result to a decrease (β=-0.0186, p<0.05) in financial performance of five star hotels in Kenya. The study therefore recommends five star hotels in Kenya to ensure they maintain optimal liquidity to ensure organizational efficiency and effectiveness and upholding of good relations with stakeholders. There is also need for the five star hotels to embrace effective solvency risk systems that have a suitable solvency risk environment operating under a sound credit administration that involves monitoring and proper solvency risk controls; this would help in minimizing possibilities of firm failure. Also, the companies should engineer effective strategies to address solvency risk issues carefully this is because poorly designed solvency risk policies would compromise asset quality and expose the company to financial distress.