A Comparative Study on the

Characteristics of Financial and

Industrial Firms listed in the Philippine
Stock Exchange
Bautista, Ramos, Salita
Background of the Study
● Investing in the stock market yields to greatest return in the long-run (The
Philippine Stock Exchange, n.d.)
● Financial and Industrial sector accountable for the 48% of market capitalization
(Stotz, 2017)
● Drivers of the Philippine Economy (PSA, 2018)
● Manufacturing sector has an average growth rate of 8%
● Finance sector grew by 7.6% last year alone
Statement of the Problem
1. Does the economic sector that a firm belongs to affect its behavior towards
business decisions?
2. What characteristics does listed firms in the financial and industrial sectors
possess that affects their performance?
3. Are the following variables - profitability ratios, liquidity ratios, and financial
leverage- are statistically significant and does it affect firm performance?
Objectives
● To assess and quantify the behavior of firms belonging in the industrial and
financial sector in terms of their risk management, liquidity, profitability, and
growth.
● To determine if a firm under the industrial or financial sector can affect the firm’s
capability to generate higher sales and profits.
● To show whether there is a significant correlation or independence between the
categorical variables that will be used in the study.
● To provide policy recommendations that will aid firms belonging in the industrial
and financial sector in their decision making regarding operational strategies that
may be used to maximize their performance.
Hypotheses Statement
● Risk Management
Ho: There is independence and no significant relationship exists between a firm being
in the industrial/financial sector towards having higher/lower risk.
Ha: There is association and a significant relationship exists between a firm being in
the industrial/financial sector towards having higher/lower risk

● Firm Growth
Ho: There is independence and no significant relationship exists between a firm being
in the industrial/financial sector towards having faster/slower firm growth.
Ha: There is association and a significant relationship exists between a firm being in
the industrial/financial sector towards having faster/slower firm growth.
Hypotheses Statement
● Liquidity
Ho: There is independence and no significant relationship exists between a firm being
in the industrial/financial sector towards having higher/lower liquidity.
Ha: There is association and a significant relationship exists between a firm being in
the industrial/financial sector towards having higher/lower liquidity.

● Profitability
Ho: There is independence and no significant relationship exists between a firm being
in the industrial/financial sector towards having higher/lower profit margins.
Ha: There is association and a significant relationship exists between a firm being in
the industrial/financial sector towards having higher/lower profit margin.
Significance of the Study
● For Investors - Beneficial for those who plan to invest in the aforementioned
sectors earlier
● For Academe and Researchers - The paper is believed to have findings and
contributions that would be essential to the development and analysis of different
stock markets
● For Financial Institutions - It is deemed to be advantageous for financial
institutions who are affiliated to the selected sample
Scope and Limitation
● Limited to selected listed firms that belongs to financial and industrial sector of
the PSE
● Obtained from OSIRIS, Thomson Reuters Eikon, Bloomberg, and PSE
● Will be using datasets from 2006, 2011, and 2016
Definition of Terms
1. Profitability Ratios - Determines the ability of the firm to yield an income over its incurred expenses. A higher value
indicates a good performance of the firm. It includes (1) profit margin, (2) return on assets (ROA), and (3) return on equity
(ROE).
2. Liquidity Ratios - Determines the ability of the firm to meet its debt obligation and its margin of safety including
working capital, current ratio and quick ratio. It is essential when establishing benchmark goals, comparing the strategic
position of the firm against its competitors.

3. Financial Leverage - Determines the degree to which a corporation uses debt and preferred equity. As the firm increases
its debts and preferred equities, interest payments increases reducing the earnings per share (EPS) of the firm. It implies
that the more the firm uses debt-financing, the higher their financial leverage which increases their interest rates negatively
affecting the bottom-line net income of the corporation.
Definition of Terms
1. Efficient Market Hypothesis - As stemmed from Fama (1970) states that all relevant information and
fundamentals are reflected on the stock price. Thus, it is futile to predict and impossible to outperform
the market using fundamental and technical analysis. It includes three forms, primarily: Weak Form,
Semi-Strong Form, and Strong Form.
2. Trade off Theory - It claims that using debt to finance the firm operations and obligations is initially
cheaper than using equity to finance its operations and obligations.
3. Pecking Order Theory - As stemmed from Myers (1984) states that retained earnings should be opted
to use when a firm wants to finance itself internally.
 CHAPTER 2

Bautista, Ramos, Salita

RRL for Risk Management
● Bonaime, Hankins, and Hanford (2018) states that financial flexibility is dictated by payout
decision and risk management

● In the study made by Quon and Zeghal (2012), the results showed that the operational
performance, accounting performance, and financial market performance of financial and
non-financial firms showed both positive and negative results.

● According to Adeusi, Akeke, Adebisi, and Oladunjoye (2014), the results showed that there
is a significant positive relationship between risk management and debt-to-equity ratio.
RRL for Risk Management
● In the study of Bui and Lin (2018), based on their results, the findings showed that
influences of CEO characteristics and corporate governance are not significant. Moreover,
the paper argue that risky business models lead to poor performance during financial crisis.

● In a paper written by De Haas and Horen (2013), the authors claim that there is a significant
amount of heterogeneity in reducing credit less to banks who are located in a market where
they are experienced at, geographically close, in a country wherein they are integrated to a
network of domestic co-lenders, and lastly, to the market where they operate a subsidiary.
RRL for Growth
● According to Kim and Rescigno (2017), expansionary monetary policy shocks can
substantially reduce the costs associated with external financing.

● In a research written by Arslan and Zaman (2014) The results show that both size of the
firm and price earning ratio have a positive relationship with stock prices.

● In the study of Khalidazia, Universitas, and Iskandar (2012) the authors claims that
profitability and liquidity ratios have no significant relationship towards the growth of
profit.
RRL for Liquidity
● Upneja, Kim, and Singh (2000) The research showed that small firms possess higher
liquidity and short-term debt ratios. On the other hand, large firms have a greater portion of
long-term and total debt.

● In the study of Chen and Yeh (2017) Based on the results, the study showed that in general
safe banks hold more liquid assets and therefore have better liquidity health.

● According to Al Nimer, Warrad, and Al Omari (2015), the study claims that there is a
positively significant relationship between ROA and quick ratio which indicates that
profitability among the Jordanian banks are influenced by liquidity

● In a study by Botoe (2017), it was found that liquidity of an asset has a positive relationship
towards profitability.
RRL for Profitability
● In a study made by Sucuahi and Cambarihan (2016), the result states that only
profitability possess a positive relationship with the firm’s value.

● In the study made by Huang and Hou (2018), the authors used research and
development as well as financial ratios as determinants of profitability. The results
showed that innovation behavior is influential on firm’s profitability

● Petria, Capraru, and Ihnatov (2015) claims that profitability of banks varies if it is
based on Return-On-Asset (ROA) and Return-On-Equity (ROE) and if it is
bank-specific (internal) or industry-wide (external) wherein macroeconomic
environment must be taken into consideration.
Research Gap
● While previous studies may have conducted a similar research on the firm level by assessing
their performance alone. The main focus of this study is on the testing of correlation
between the industrial and financial sectors towards specific firm characteristics such as risk
management, liquidity, growth, and profitability. The said characteristics can be quantified
with the use of financial data and financial ratios. This study will include a test of correlation
or independence on the variables that will be used and the analysis of variance method will
be used as well.
Literature Map
CHAPTER 3
Efficient Market Hypothesis
● In general, stock market efficiency is prevalent when a market where stock prices emulate
fundamental information about companies. In such a case, the market value of the company
changes in a way very similar to that of the intrinsic value of a company. According to
Eugene Fama (1970), he claims that “prices always reflect all available information”.
Moreover, he generally believed that securities markets were extremely efficient in reflecting
information about individual stocks and about the stock market as a whole. Moreover, the
study of financial statements which is fundamental analysis, plays an important role because
it helps the investor know the firms transparency and position.
Trade off Theory
● Similar with the Modigliani-Miller theorem, it states that it is more reasonable to finance
through debt than equity because of the tax deduction and lesser risk it possess. Through
capital structure, the weighted average cost of capital (WACC) can be diminished (Frank &
Goyal, 2005). Moreover, it makes the case that a company’s optimal capital structure should
be the prudent balance between the tax benefits that are associated with the use of debt
capital, and the costs associated with the potential for bankruptcy for the company. Trade
off theory plays an important role because this affect the profitability of the firm, as the firm
chooses how much debt finance and how much equity finance to use by balancing the costs
and benefits.
Pecking Order Theory
● The pecking order theory assumes that there is no target capital structure. The
firms choose capitals according to the following preference order: internal
finance, debt, equity. Myers and Majluf (1984) argued the existence of
information asymmetry between managers (insiders) and investors (outsiders).
They argued that managers have more inside information than investors and act
in favor of old shareholders. In conclusion, firms should prefer three sources of
financing through (1) retained earnings, (2) debt and (3) issuing new equity.
Through it, the performance of the firms is reflected and signaled to the public.
When a firm is capable of financing itself internally, it means it is strong. When it
relies on debt, it signals that it can meet its obligations.
Conceptual Framework

This framework explains the variable that might affect profitability, which is the dependent variable of the study. The
variables of Risk Management, Liquidity, and Growth are the independent variables that will be regressed to know on whether
they significantly affect profitability.
CHAPTER 4
Data Collection
● Financial Statements of Financial and Industrial Firms

● Years of 2006, 2011, 2016

● Thomson Reuters Eikon

Firm Classification
● Classify into Industrial and Financial

● PSE Edge Website

● Financials, Industrial, Property, Services, Holding Firms, Mining and Oil

Objective 1: To assess and quantify the behavior of firms in
the industrial and financial sectors in terms of their risk
management, liquidity, growth, and other characteristics.

Objective 2: To determine if a firm being in the industrial or

financial sector can affect the firm’s capability to generate
higher profits.
Operational Framework
Leverage = Debt-to-Equity Ratio
Firm Growth = Price-to-Earnings Ratio
Liquidity = Quick Ratio
Profitability = Profit Margin Ratio / Return on Equity
Arranging the Data
● Finding the Median = the middle value

● The median will be the “standard”

Chi Square test of Independence
● Used when there is two categorical variables from a single population

● Used to show whether there exist a significant association or independence

between the variables used in the study.

Chi Square test of Independence
Regression Analysis
Profitability = β0 + β1risk + β2liquidity + β3growth + Ui