How do Philippine Listed Firms Make Investment Decisions?

  • Rodolfo Q Aquino UP Ceasar EA Virata School of Business


How do Philippine listed firms evaluate investment opportunities? Available survey evidence indicates that most of the firms sampled responded that they employ modern quantitative techniques that are based on maximizing shareholders’ wealth.  This paper set out to verify if this claim could find support in the statistical data examined in this study.

 Tobin’s q. defined as the ratio of the market value of a firm to the replacement cost of its total assets, was used to test the hypothesis that firms do employ the criterion of shareholders’ wealth maximization when they evaluate investment proposals.  The idea is that values of q greater than one, on the margin, should stimulate more investments and values less than one should correspondingly discourage investments until q equals unity.

 Instead, the study found statistical evidence that consistent revenue growth stimulates greater investments presumably due to the increased business confidence that revenue growth generates.  On the other hand, limitations on access to funds, either through the equity market or the loans market, dampen investments.  The significant negative influence of high fixed assets to total assets ratio also indicates that the irreversibility of physical investments once made and the setup and adjustment costs related to high fixed capital expenditures may put some restraint on investments.

 Finally, there appears to be no empirical basis to the often-cited claim that the strength of the local stock market is a solid barometer of investor confidence.  High measures of marginal q do not seem to translate into actual investments of capital in the aggregate economy.