A study on the impact of cash flows, liquid financial assets, and outstanding debt on investment of non financial companies in the Philippines

• Main Authors: Mendoza, Raymond Mitchell P., Panis, Peter Junno S.
• Format: text
• Language: English
• Published: Animo Repository 2010
• Subjects: Corporations > Finance; Business enterprises > Finance; Business enterprises > Philippines; Investments > Philippines; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/18307
• Institution: De La Salle University

Investment, to a certain extent, depends on different financial factors such as availability of internal finance, debt or equity finance, and specific credit markets. Therefore, these financial factors, in terms of liquid assets, outstanding debt, and cash flow, play a significant role in the investment decisions of firms. The study aimed to assess the impact of financial indicators on investments of listed non financial firms in the Philippines that have the largest level of market capitalization from 2002 to 2006 and was a five year annual study. The researchers used panel data analysis with a modified estimation equation derived by Devereux and Schianterelli (1989). The results show that the Philippines being an emerging market have finance led investment. The coefficient on cash flow has the expected positive sign and is statistically significant at the 5% significance level. This means that cash flows play an important role on the level of investment. For those firms that are liquidity constrained, cash flow would provide the only source of finance. Liquid financial assets affect investment but is statistically insignificant. The result, however, is a negative effect on investments contrary to apriori expectations. This is because of the trade-off that managers face which occurs between liquid assets and investments. Companies would rather invest on earning assets which could help boost the funds of the company rather than liquid assets that are often referred to as non-earning assets. Outstanding debt resulted to statistically insignificant positive effects on investment. The reverse sign contrary to a priori expectations is a result of low interest rates. With this, companies in the Philippines are able to secure debt without being too financially constrained. An explanation would be that when internal funds are low and at the same time borrowing rates are low, debt is an easy source of funding. This is also true to a lot of companies which suffered negative cash flows and thus relying on huge amounts of