Predicting significant corporate events through financial ratios: The case of Philippine listed firms

• Main Authors: Joveres, Katrina Fatima N., Ona, Nadia Kristina M., Salaysay, Larisa Jane L., Uy, Sophia Manelle M.
• Format: text
• Language: English
• Published: Animo Repository 2014
• Subjects: Ratio analysis; Investment analysis > Mathematical models
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/10128
• Institution: De La Salle University

A fundamental theory in investment is the concept of risk and return. Investors carefully consider the potential tradeoff between the amount of risk exposure and the amount of risk premium. One such risk involves various significant corporate events, such as bankruptcy and financial distress, downsizing, and equity financing, which may cause variability in the potential returns of an investment. Being innately risk-averse, investors employ various methods that may mitigate risks. To address the concern with regard to significant corporate events, this study aims to assess the likelihood of their occurrence and identify the financial ratios that would be significant in doing so. The likelihood of bankruptcy and financial distress, downsizing, and equity financing was estimated using the Ohlson model and the B.H.S. model. Panel, logit and Cox regression procedures were also employed in the estimation. Firms that were publicly listed from 2006-2013 exhibit the influence of different factors correlated with the aforementioned corporate events, particularly firm size, firm performance, firm age, working capital to total assets ratio, industry book-to-market ratio, change in key management, and consumer confidence index. These particular ratios and variables are instrumental in assessing the likelihood of financial distress, downsizing and equity financing. However, investors must not be too hasty in making decisions regarding an investment in the event that one of the aforementioned significant events prove to be likely. The importance of considering qualitative factors that may be equally important as the figures should also be recognized.