Rodolfo Q. Aquino

The paper explores the problems associated with testing the Capital Asset Pricing Model (CAPM) particularly in the Philippine setting. CAPM tests have so far failed to provide convincing evidence of the validity of the model. This appears to be the main reason why the CAPM has not found wide usage in corporate financial practice, specifically in the estimation of the cost of equity capital for a company or a project. Using empirical data for 1996-2001, two major problems are identified. The first is that the usual market proxy used, which is the Philippine Stock Exchange Composite Index (Phisix), very likely is not representative of the true market portfolio. Given market imperfections, it could very well be that no portfolio with only positive holdings, as implied by the CAPM, can be mean-variance efficient. The second problem is that the assumption that a risk-free rate lending and borrowing rate exists, usually proxied by the interest rate on the 91-day treasury bill, is probably too restrictive for the Sharpe-Lintner-Mossin version of the CAPM to hold. While the Black version of the CAPM addresses this second problem, the empirical issue of the unobservable true market portfolio still has to be addressed.

Raymund Francis R. Abara

This paper investigates whether momentum, as described by Jegadeesh and Titman (1993), exists in the Philippine stock market.  Results show that momentum did exist in the Philippine stock market prior to the Asian crisis (1991-1997).  However, upon further inspection of the post-Asian crisis sample (1998-2001), the presence of momentum was not detected.  Moreover, when the pre- and post-Asian crisis periods are combined, this aggregated sample gave weak evidence of momentum in the exchange.

Rodolfo Q. Aquino

This study focuses on the role of macroeconomic fluctuations as risk factors that influence cross-sectional variability in stock returns. The study covered the listed firms represented in the Phisix for the period 1994-2000.  It uses a multifactor asset pricing framework that is based on the inherent trade-off between risk and return that has been a basic principle of investment theory since at least Markowitz. Seven macroeconomic factors, in addition to excess market return, are identified as potential sources of significant risks to individual firms. Regression results indicate that fluctuations in all of these macroeconomic factors have significant influence on individual stock returns.

An exact formulation of the multifactor asset pricing model, however, fails to price the macroeconomic risk factors. Some possible explanations are offered for the poor results. The first one is that available macroeconomic data do not provide adequate measures of the underlying systematic risks that influence returns. This includes the possibility that some significant macroeconomic risk factors are omitted from the model because of lack of data. The second is that lack of market efficiency may result in excess profits that can be gained by arbitrage, violating the major assumption of the exact formulation of the multifactor model. Finally, large idiosyncratic risks that are not fully diversified away may be present in investor portfolios. These do not necessarily invalidate the model but they can lead to large pricing errors such that tests have little power to reject the null hypothesis that factor prices are zero. Thus, systematic risks due to macroeconomic factors, while significant, may not by themselves be able to fully explain observed variation in stock returns. Some areas for further research are indicated.

This paper validates the structure-conduct-performance (S-C-P) paradigm and the efficient structure (relative efficiency) hypothesis by estimating the banks' profit function that takes both market share and concentration measure.  Drawing on Philippine bank-specific and industry-level data from 1990 to 2001, this paper provides evidence that market share positively influences banks' profitability while industry concentration is not significant in determining the banks' profit function.  Market share, though, is not entirely due to differential efficiency, as regulation-driven mergers preserved the rankings and profit levels of the top banks.  Profitability is also positively and significantly explained by the banks’ capital asset and demand deposit-to-total deposit ratios, and the growth of the market deposit level.  The data support the general finding in the literature that banks do not have scale economies.  The study, though, finds that banks have scope economies, proxied by the banks’ ability to engage in universal banking activities as opposed to plain commercial banking functions.  Foreign bank entry is also not significant in affecting profit, but the Asian financial crisis did, albeit with slight significance.

Vivien T. Supangco

This study looked into the relationship between CEO (Chief Executive Officer) duality and board independence measured in terms of the percentage of outside directors. Results from a sample of 65 records of companies listed in the Philippine Stock Exchange showed that there is a positive relationship between CEO duality and board independence, which is contrary to expectations of the agency theory. However, when the interaction of board independence and industry was introduced, the main effect of board independence disappeared even as the interaction effect was significant and in the positive direction. The result suggests that the effect of board independence cannot be taken separately from industry dynamics. In addition, the null result of the interaction effect of board independence and organizational age suggests that tradition negates the relationship between board independence and duality.

Myra Vina D. Agatep

This paper examines the normally taken-for-granted reciprocal relationship between advertising and sales utilizing data from three types of Philippine consumer goods. “Excessiveness” of advertising expenditures is also explored by comparing optimal and actual industry advertising intensity ratios. Results reveal that the relationship is not reciprocal: advertising positively influences firms’ sales but sales do not influence advertising. Furthermore, results on the test of excessiveness of advertising expenditures show that Philippine companies need to advertise more.

Marie Therese F. Agustin

This article summarizes the results of a study examining the 2001 and 2002 financial statements of publicly listed firms for compliance with financial reporting requirements. The requirements are embodied in the Securities Regulation Code Rule 68 and the Accounting Standards Council Statements of Financial Accounting Standards.

The results of the study showed that most of the listed firms follow most of the prescribed rules.  However, only 7 percent of the statements reviewed followed all the rules. Common infractions were lack of disclosures on long-term debt, property, plant, and equipment, related party transactions, and accounts and notes receivable. Most grave among the incidents of noncompliance with the rules, with potentially very harmful effects, were accounting treatment violations.

The results also showed marked improvement in financial reporting practices in 2002, compared to 2001.

Ernesto P. Pineda

This paper assesses the overall effort associated with entrepreneurship development in the Philippines.  The assessment focuses on the Small and Medium Enterprises (SME) sector and the agencies and other entities involved in assisting SMEs. The University of the Philippines Institute for Small Scale Industries (UP ISSI) model of entrepreneurship development was used to highlight significant activities of the effort. The assessment showed that the service intensity of some government agencies charged with SME promotion appears to be low because several of them are tasked to do similar functions.  It also identified and discussed areas and issues crucial to entrepreneurship development.