Academic journal article Journal of International Business Research

Speculative and Pure Risks: Their Impact on Firms' Earnings per Share

Academic journal article Journal of International Business Research

Speculative and Pure Risks: Their Impact on Firms' Earnings per Share

Article excerpt

ABSTRACT

A fast and growing management approach which is currently gaining confidence from the managers is Enterprise Risk Management (ERM). Risk is an investor's uncertainty about the economic gains or losses that will result from particular investment. (Hitt, 2006). Returns are often measured in terms of accounting figures such as return on assets, return on equity or return on sales. Returns can also be measured on the basis of stock market returns such as monthly returns (the end of the period stock price minus the beginning stock price divided by the beginning stock price, yielding a percentage return). Earnings per share is another means to gauge performance. Reduction in costs, expenses and losses increases income thereby creating value for the investors. More investors would mean more employment generation and growth perspective at the Bataan Economic Zone.

This study investigated risk exposures such as speculative and pure risks and their impact on firms' earnings per share. The venue was Bataan Economic Zone in the Philippines comprising of 38 companies or 100% locators as survey participants, all manufacturing firms. The companies were moderately exposed in terms of speculative risks namely output and input commodity price risk, foreign exchange risk, interest rate risk, and credit risk and rarely exposed to pure risks covering physical assets, human resource, legal liabilities and work related injuries.

Furthermore, the use of Earnings per share as proxy variable, based on the statistical evidence from regression analysis, failed to establish significant relationship and causal link between EPS and speculative and pure risks, of 38 companies in Bataan Economic Zone in the Philippines. It further identified that the variables of the study do not exert significant impact on firms' earnings per share.

Keywords: Risk exposures, Speculative risk, Pure risk, Economic Zone and Earnings per share.

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Two months after the imposition of martial law, Marcos issued Presidential Decree 66 (PD 66) to facilitate the development of the Bataan Export Processing Zone (BEPZ, now Bataan Economic Zone), providing incentives specifically for export production. PD 66 gave firms that exported at least 70 percent of their products "permission for 100 percent foreign ownership; permission to impose a lower minimum wage than in Manila; tax exemption privileges, including tax credits on domestic capital equipment, tax exemptions on imported raw materials and equipment, exemption from the export tax and from municipal and provincial taxes; priority to Central Bank foreign exchange allocations for exports; low rents for land and water; government financing of infrastructure and factory buildings, which could then be rented out or purchased by companies at a low price; and accelerated depreciation of fixed assets." The incentives worked: "By 1980, the Bataan EPZ had attracted 57 enterprises, the great majority foreign owned, employing some 28,000 workers.

With the available venue to house a medium industry, Bataan Economic Zone was then a haven for foreign investments. Export production in BEPZ grew steadily for the first 10 years but then significantly declined throughout the rest of the Martial Law. Several reasons may have brought the slow down and among which are the various risks to which the companies were exposed to. What matters was how risks were handled and the culture in which the company operates.

A fast and growing management approach which is currently gaining confidence from the managers is Enterprise Risk Management (ERM). Risk is an investor's uncertainty about the economic gains or losses that will result from particular investment. Returns are often measured in terms of accounting figures such as return on assets, return on equity or return on sales. Returns can also be measured on the basis of stock market returns such as monthly returns (the end of the period stock price minus the beginning stock price divided by the beginning stock price, yielding a percentage return). …

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