1

Chapter I
THE PROBLEM

This chapter presents the problem of the study. Specifically, this shows

the introduction, the background of the study, statement of the problem,

theoretical framework, conceptual framework, hypothesis of the study, scope and

limitations of the study, significance of the study, and definition of terms.

Introduction

Setting goals and objectives is vital for any entrepreneur overseeing

whether a new or growing company. Business owners set different types of

objectives, including financial objectives, to give a solid plan for moving in the

direction of long-term success. Common financial business objectives include

increasing revenue, increasing profit margins, retrenching in times of hardship

and earning a return on investment. (Ingram, 2018)

However conflicts may arise when the interest of the investors and

company are in different direction. (Chasan, 2012) Shareholders expect more

from the company’s decision on the retention of revenue to pay it out as

dividends. Shaping a substantial portion of the commercial real estate market in

the Philippines today, the transition has spurred various opportunities for the

biggest and the tiniest segments of property developments despite of competition

which is advantageous for both real estate companies and investors. (Robles,

2018)

The companies must also take into account future management, business

expansions and investments for it to grow and the way to do it is to retain the

earnings.
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This study aims to identify the effect of retained earnings to the firm’s

stock returns on the real estate business which is known to be a booming

industry for years since the Philippines has been experiencing a rapid

urbanization.

Background of the Study

The real estate industry’s steady growth in the past decade in the

Philippines is connected to the increase in demand for residential and

commercial properties driven by different factors. These demand drivers,

according to a report by Leechiu Property Consultants, include rising urban

population growth; housing needs of BPO (business process outsourcing)

employees, since a growing number of these workers need to live near their

workplace; and remittances from overseas Filipino workers (OFWs), more than

half of which are real estate-related. (Ortiguero, 2018) Due to this, the stock of

real estate companies has outperformed because many investors believe in its

business model. However, companies want to be assured of continuous

inventories to sell to prospect and qualify the best available affordable investment

options in the market. (Peavler, 2018)

However, investors look forward for a high return on their investment.

Buffet emphasizes return on equity (ROE) , a key measure of a company’s

profitability. He is particularly fond of firms that don’t require a lot of capital, as

they tend to produce much higher returns. (Investing Answers)

The investors and company desires are in conflict. Real estate companies’

retained earnings somewhat reflect its dividend policy as they reflect a

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companies’ decision to either reinvest profits or pay them out to shareholders.

Capital intensive industries and growing industries tend to retain more of their

earnings than other industries because they require more asset investment just

to operate. Whereas some investors may not be pleased if their organization

increased amounts of earnings retentions, Ball (2013) postulates that earnings

are one component of the corporation's net-worth and it increases the supply of

cash that's available for acquisitions, repurchase of outstanding shares, or other

authorized expenditures. But the big question on investor’s part lies whether is it

worth to retain its earnings.

A lot of issues have arisen regarding real estate industry. For instance,

the local IT and business process management (IT-BPM) industry faces some

uncertainties with Donald Trump as the new president of the United States, and

with President Duterte’s earlier controversial remarks against the economic giant.

It should be noted that the US accounts for more than 70 percent of the IT-BPM

business in the country, and the industry is currently one of the more significant

growth drivers of the office property market. This particular segment has been

touted as one of the brighter spots in the real estate sector. Others are global

economic upheavals that might affect overseas Filipino workers’ movement and

their housing investments; political issues that might compromise decisions

related to the Creation of the Department of Housing, which is a long overdue

proposal (almost 20 years) to have a dedicated department to manage and

regulate this important sector; Political issues that might compromise decisions

related to the Creation of the Department of Housing, which is a long overdue

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proposal (almost 20 years) to have a dedicated department to manage and

regulate this important sector; the country’s readiness to implement the Real

Estate Investment Trust (REIT) Law, which is another overdue initiative that is

expected to boost real estate investment for ordinary stock market players. The

REIT law should be initiated hand in glove with the Tax Reform Law; and a

potential conflict between two critical agencies in the government: the housing

and agrarian agencies, as to the issue of land ownership. Given the challenges

facing the real estate industry today, there is greater need to protect both the real

estate industry itself and investors as they serve as the blood bank of the

industry. From this, the proponents conducted this study to establish the effect of

retained earnings to stock returns mainly on the top 10 publicly listed companies

in the Philippines. In order to establish the effect, the researchers employed

formulas in computing the stock returns or stock performance which includes

both the stock prices at the beginning and end of period as well as the stock

dividends issued over the period.

The study was conducted to provide information about the empirical

relationship between the retained earnings on the stock returns on the top ten

publicly listed real estate companies in the Philippines. Also, the study

determined the strengths and weaknesses of the real estate companies.

Statement of the Problem

This study aims to identify the effect of retained earnings to firm’s stock

returns on the top ten publicly listed real estate companies.

Specifically, this sought to to answer the following questions:

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1. What is the business profile of the publicly listed real estate companies in

the Philippines in terms of:

1.1 capitalization;

1.2 number of employees in the business;

1.3 years of business existence; and

1.4 total Assets?

2. What is the trend of retained earnings using the retention ratio of the

publicly listed real estate companies in the Philippines from 2013-2017?

3. What is the trend of stock returns of the publicly listed real estate

companies in the Philippines from 2013-2017?

4. Does retained earnings of the publicly listed real estate companies affect

its stock returns when profile intervenes?

5. Based on the findings, what information educational communication

materials may be developed?

Theoretical Framework

Theoretical framework served as the basis of the researchers in promoting

the structure of their study. It also helps develop hypothesis and support

directions of discussions of the study. This study will be guided by theories which

have previously been developed and that have called for more research on the

subject over the years. This study used the effect of Retained Earnings on the

Returns of Firms listed at Nairobi Securities Exchange theory by Thuranira

(2011).
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In his study, revenue retentions also called retained earnings or retained

surplus refer to the portion of a company's profits that is kept for reinvestment

into the business or for debt payments, instead of being paid out rather as

dividends to shareholders. Due to thefact that only few options are available for

raising capital, most executives generally prefers cash from operations as a

major source of capital for re-investment and firms’ growth.Consequently, some

organizations prefer to retain more earnings and plow it back into operations

especially when they have viable investment opportunities.

Moreover, to measure the effect of these variables, Thuranira stated that

dividends for the period and the beginning and end of period stock prices were

used to compute the stock returns. Notably, the aforementioned formulas

employed in computing the stock returns or stock performance reflects the stock

prices and stock dividends issued over the period.

On the other hand, the periodic retained earnings divided by the annual

income for the period which is also known as the Retention Ratio have been

defined as a foregone dividend. Retained earnings ultimately come back to the

equity shares in the form of enhanced dividend or capital gains and the latter

computation also measures quantitatively the retained earnings of the company.

Conceptual Framework

In this part of the study, the main intention is to identify the effect of the

retained earnings on the stock returns of the top 10 publicly listed real estate

companies in the Philippines. In order to achieve its objective, the researchers

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prepared conceptual framework that leads them on finding the solution of their

problem.

Input Process Output

Profile of the
business in terms of:  Data gathering
 Capitalization through
 Number of collecting and Proposed
employees analyzing Information,
 Number of financial Education and
business statements Communication (IEC)
existence Materials
 Total Assets  Statistical
Treatment of
Retained Earnings data

Stock Returns

Figure 1
Conceptual Paradigm

The study used input-process-output model as shown in Figure 1. The

input covered the profile of the business in terms of capitalization, number of

employees, number of years in the operation and total assets. It also includedthe

retained earnings and stock returns that could be obtained in the financial

statements of the company on a five year trend.

The process involved the data gathering through collecting and analyzing

the financial statements and statistical treatment of data in order to identify the

relationship and effect of these variables to each other.

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Its output was Information, Education and Communication (IEC) Material

that can be beneficial specifically to the real estate companies.

Hypothesis of the Study

To determine the possible outcome of the study, the researchers ended

up with this null hypothesis.

Ho: There is no significant relationship between retained earnings and

firm’s stock returns when profile intervenes.

Scope and Limitations of the Study

The proponents conducted this study to identify the effect of retained

earnings on the stock returns mainly on the top 10 publicly listed companies in

the Philippines. It can provide information about the empirical relationship

between the retained earnings on the stock returns on the listed companies. The

study utilized secondary data, therefore it focused on the financial statements

and stock prices which are available on their annual reports. The processes of

the study involved the gathering and computing the stock returns and retained

earnings on a five year trend from year 2013 to 2017 and apply the R and R

Square, Analysis of Variance, Pearson’s Correlation in order to identify the

relationship and effect of these variables to each other.

The researchers used the top 10 publicly listed Real Estate companies in

the Philippines ranked based on capitalization, which held a large market share

in the real estate industry in the Philippines. The possibility of following different

accounting practices made by the publicly listed companies which resulted to

further deviation are one of the errors impounded into the research. Also, the
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errors in the data on prices as researchers are provided by the PSE, as well as

during the process of stock returns computation would possibly be confined in

the study results. However, since the study used top ten publicly listed real estate

companies for a period of 5 years, the effect of possible errors from the data

cannot affect the results fundamentally. During data collection, the researchers

encountered problem which resulted to elimination of the two listed companies

belonging to top ten: the Cebu Landmasters, Inc. and Double Dragon Properties.

The unavailability of financial statement happened during their transition and

adjustment years, and the researcher, with the guidance of the adviser pick the

top 11 and 12 as replacement. Also, the researchers conducted the study within

a short study period may not have allowed the researcher to consider more

variables and to measure more phenomenon related to the study variables such

as; those relating to the relationship between the variables across different

markets and times to establish the impact of the retained earnings on future

stock returns. However, the researcher gave the study maximum time and

attention by allocating more time to the study so as to complete within time and

to produce top quality paper.

Significance of the Study

The study is deemed significant in acquiring information and knowledge

in determining the empirical relationship between earnings retentions and stock

performance of the top 10 real estate listed firms in the Philippines.Vital results of

this study can be highly significant and beneficial specifically to the following:
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To the managers and investors, this study provides guidance when

making their investment strategies. It enables investors to use retained earnings

and information of financial statements to identify the future returns on stocks.

The information provided through this study helps portfolio managers in the

allocation and valuation of stock price movements.

To corporate managers,the study provides guidance to corporate

managers to judge investors various reactions on different accounting

information.

To the stock traders, the research can help them to determine how to

act on a firm’s earnings retentions.

To the present researchers, the researchers will become more

knowledgeable in different aspects especially the viability of the listed companies

and its investments’ potential. Related literature and studies reviewed by the

researchers provide them meaningful information and ideas.

To the future researchers, this study serves as a reference material

that will guide them in conducting their own study using variables not covered in

the present study. Also, they can acquire knowledge through method and

technique’s application in the preparation of the study.

Definition of Terms

The researchers defined the following terms as to their conceptual and

operational definition for common frame of citation.

Capitalization.Refers to the process of determining the quantum of funds

that a firm needs to run its business (Paramasivan,2012). In this study,

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capitalization refers to the number of outstanding shares multiplied by share

price.

Dividends.  These are distributions of earnings or capital to the

shareholders in proportion to their shareholdings. (Valix, Peralta, & Valix,

2017) In this study, dividend will be defined as a share of a company's

profits distributed to shareholders.

Information, Education and Communication. This refers to an

approach which attempts to change or reinforce a set of behaviours in a target

audience regarding a specific problem in pre defied period of time (Stephen

Syama, 2014). In this study, it refers to the output designed from gathered and

tested with regards to the variables used.

Investment.  These is an asset held by an entity for the accretion of

wealth through distribution such as interest, royalties, dividends and rentals for

capital appreciation or for other benefits to the investing entity such as those

obtained though trading relationships.(Valix, Peralta, & Valix, 2017)In this study,

investment will be defined as the amount used for further projects with the

purpose of increasing income.

Net Income.It refers to as the bottomline, net profit, net pay or net

earningsis an entity’s income minus cost of goods sold, expenses and taxes for

an accounting period (Rosenbaum, 2014).In this study, it is defined as the profit

after deduction of expenses.

Real Estate. Property in buildings and land (Kiyosaki, 2009). In this study,

real estate will be defined as the property like buildings and land.
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Retained Earnings.It is defined as the accumulated profits by a company

for its expansion and diversification activities (Paramasivan, 2012). In this study,

retained earnings will be defined as the retained earnings when divided by the

net income of the company.

Retention Ratio.Opposite to dividend payout ratio and is calculated by

subtracting total dividend from total earnings and then dividing the resulting

amount by earnings[ CITATION Boo10 \l 1033 ]. In this study, retention ratio will

be defined as the total number of retained earnings divided by total income.

Stocks. Are equity investments, which means that buying even one share

of a company’s stock means you are a part-owner[ CITATION Ram16 \l 1033 ].In

this study, stock are share of a company held by an individual or group.

Stock Price.Simply the market price of a particular stock[ CITATION

J3P13 \l 1033 ]. In this study, stocks price are the closing price in the beginning

and the year end.

Stock Returns.A stock return as a profit obtained from an investment on

a stock security(Strong, 2009). In this study, stock returns will be defined

asappreciation in the price plus any dividends paid, divided by the original price

of the stock.

Total Assets.It is defined as to be equal to the liabilities plus equities of

the company at a specified time. (FME, 2013) In this study, it will be defined as

the owned by a person or entity that are recorded in the accounting records and

appear in the balance sheet of the business

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Chapter II
REVIEW OF LITERATURE

This chapter deals with the review of related concepts and studies found

in previous literature. It also presents a synthesis of reviewed research literature.

Conceptual Literature

In the light of various changes in the business environment, real estate

acquisition has been noted to be profitable. Real estate value generally increases

over time due to its supply and demand. Demand for property is technically

growing higher bit by bit (Evans, 2008). Company news often focuses on rises or

falls in share prices overlooking the importance of the dividend payment

(environment, business expansion and business outlook while building internal

reserve for reinvestment toward enhancement of corporate value. However,

according to Chasan (2012), there is always Thornton, 2012). Therefore,

companies are taking into account future management a conflict in determining

the earnings to be retained. Shareholders expect more from company’s decision

on the retention of revenue that initially companies reinvest for firm’s growth

instead of paying out to the shareholders.

Stock Returns

Stocks, also generally known as shares, allow a person own a portion of a

public corporation. The owners sell control of the company to stockholders to

gain additional funds to grow the company. Shares of public companies trade on

regulated stock exchanges, where investors can place buy and sell

orders [ CITATION Bas18 \l 13321 ].Once the investors acquire certain number of
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shares, they have the right to participate and vote in annual general meetings.

Additionally, they also can acquire certain rights like inspection of certain

company information, principally the register of members and minutes of general

meetings; to apply to court for permission to bring a derivative claim; to receive

notice of, attend and vote at shareholder meetings; to appoint one or more

proxies to vote on their behalf at general meeting; to receive a certificate in

respect of shares registered in that shareholder’s name; ability to require

company to circulate a written statement regarding business at a general

meeting in advance of that meeting ; to require a company which would

otherwise be exempt to have an audit; able to prevent shareholder resolutions

being passed as special resolutions; able to consent to the holding of a general

meeting on short notice; and ability to requisition a general meeting. [ CITATION

Coo09 \l 1057 ]

Moreover, shares are an integral part of the economy because they are a

core component of most investment portfolios [ CITATION Bas18 \l 13321 ]. A

number of studies in economicsliteraturehave established a positive relationship

between economic growthand stock market development where shares belong.

A well organized and managed stock market arouses investment opportunities in

the country by recognizing and financing productive projects that ultimately lead

to economic activity, allocates capital efficiently, mobilizes domestic savings,

helps diversifying risks and facilitates exchange of goods and services.

[ CITATION Naz10 \l 1057 ] Whereas, portfolio investment from shares of

business mans and interpreneurs results to an increase in the liquidity of

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domestic capital markets, brings discipline and know-how into the domestic

capital markets, and facilitates the use of new products and instruments for risk

mitigation. [ CITATION Alb15 \l 1057 ]

According to Nangalia & Kothari (2018) secondary market refers to a

market where securities are traded after being initially offered to the public in the

primary market and/or listed on the Stock Exchange. Majorityof the trading is

done in the secondary market. Secondary market comprises of equity markets

and the debt markets comprises of equity markets and the debt markets.

Additionally, there are various types of shares and investment products to

suit different individual needs in the stocok market, for example conservative or

“safe” shares versus riskier shares. Basic share investment products is like

Ordinary shares, B-Ordinary shares, N-Ordinary shares, Preference shares,

Exchange Traded Funds[ CITATION The18 \l 1057 ]. Thus, the risks invoved in

the stock market are issuer risk which pertains to the borrower’s credit capacity

and credit worthiness and is therefore a meeasure of the borrower’s solvency;

country risk which is the manifistation of itself mainly in the form of exhange rate

risks and transfer risk which may impede or entirely prevent the international

movement of payments or capital; liquidity risk which is the possibility of

purchasing or selling a financial instrument at any time at prices with the market

where there may be a insufficient or non-existent purchase or sale at a desired

time or disred price; market risk is the risk that there is a potential fluctuation in

the value of a financial instrument,and currency risk where there is a

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diminishment in the value of the foreign currency investment. [ CITATION Ris17 \l

1057 ]

In connection with this, shareholders may receive cash flows (dividends) if

a company’s board of directors declare that the company has performed well and

has enough profit to distribute to its shareholders[ CITATION The18 \l 1057 ]. It is

a way to reward stockholders, who are the actual owners of the company, for

their investment. It's especially important for companies that are profitable, but

may not be growing quickly. (Amadeo, 2018)

In most companies, the shareholder value is defined as a company

objective that has shareholder wealth as its highest priority. It has also other

purposes inside the company, which includes maximize value through policies

that enhance company earnings, maximizing market value of company shares

and increase both the amount and frequency of shareholder wealth paid.

[ CITATION Mäe16 \l 1057 ]

Therefore, investors expect the returns on a broadly diversified portfolio of

stocks to stay constant over time, based on their long-run historical average.

[ CITATION Dav12 \l 1057 ]

In an argument by[ CITATION Fox12 \l 1057 ] corporate reality, though,

has proved stubbornly uncooperative. In legal terms, shareholders don’t own the

corporation (they own securities that give them a less-than-well-defined claim on

its earnings). In law and practice, they don’t have final say over most big

corporate decisions (boards of directors do). And although many top managers

pledge fealty to shareholders, their actions and their pay packages often bespeak
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other loyalties. This gap between rhetoric and reality—coupled with waves of

corporate scandal and implosion—has led to repeated calls to give outside

investors even more say. If only corporations really did put shareholders first, the

reasoning goes, capitalism would function much better.

However, for most organizations, value-creating growth to shareholders is

the strategic challenge, and to succeed, companies must be good at developing

new, potentially disruptive businesses. Most companies greatly benefit from

company’s change from short-term earnings to long-term priorities. Stock prices

are all about the current business’s possibility of future growth and will also help

the business to keep surviving and hopefully thriving in the long term.

[ CITATION IEE17 \l 1057 ]

In the accounting treatment, under IFRSs, IAS 39 is the primary source of

guidance on the recognition and measurement of financial assets and financial

liabilities, including investments in debt and equity securities, for entities that

have not adopted IFRS 9. Stock return is known to be the profit obtained from an

investment on a stock security. (Thuranira M. G., 2014)

Total Stock Return = (P1-P0) + D

P0

P0 = Initial Stock Price

P1 = Ending Stock Price

D = Dividends
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The formula for the total stock return according to Total Stock Return

Calculatoris the appreciation in the price plus any dividends paid, divided by the

original price of the stock. The income sources from a stock is dividends and its

increase in value. The first portion of the numerator of the total stock return

formula looks at how much the value has increased (P 1 - P0). The denominator of

the formula to calculate a stock's total return is the original price of the stock

which is used due to being the original amount invested.

Stock prices are driven by expectations of corporate earnings, or profits. If

traders think the company's earnings are high, or will rise further, they bid up the

price of the stock. (Amadeo, 2018)

As reported by [ CITATION Yee18 \l 1057 ] , ecery casual follower of

financial news knows, stock prices rise and fall in response to earnings and

revenues that is why this a great measurement of the stock returns in a

company.

Moreover, the rise and fall of stock prices has been an issue of concern

for the researchers in the past. The inquisitiveness of researchers has been

increasing over the yearsto know the connection between stock prices and the

macro-economic variables. They have explained the interaction between these

variables and stock prices through different approaches and models. Price

variations in the stock market are the most closely monitored economic

phenomena among the policy makers, companies, investors and researchers.

Stock prices are determined by the forces of demand and supply. There is no
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clear evidence that tells us, exactly which factors are responsible for the variation

in the stock prices. But academicians and researchers do know a few things

about the forces that move a stock up or down. These forces fall into three

categories: fundamental factors, technical factors and market sentiments.

[ CITATION Ati10 \l 1057 ]

The fundamental factors involves fundamental analysis which is a method

of evaluating a security performance by measuring its intrinsic value through

examining financial, qualitative, quantitative factors, and other related economic

factors. Fundamental analysis determines the health and performance of an

underlying company by looking at key numbers and economic indicators. The

purpose is to identify fundamentally strong companies or industries and

fundamentally weak companies or industries. Investors go long (purchasing with

the expectation that the stock will rise in value) on the companies that are strong,

and short selling shares that you believe will drop in value with the expectation of

repurchasing when at a lower price the companies that are weak. 

A factor that can affect stock price are the technical factors such as

financial, environmental and managerial factors. [ CITATION Sha15 \l 1057 ]

While, market sentiments are the component of expectations about asset returns

that are not warranted by fundamentals and can affect the movement of stock

prices by the consumer confidence index whereas the consumer confidence

decreases, the consumer spending will also decrease which in turn will cause a

decrease in corporate profits and stock prices.[ CITATION Bol14 \l 1057 ]

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On the other hand, a dividend is a share of a company's profits distributed

to shareholders, and usually paid quarterly, like a bonus to investors. It is a way

for shareholders to participate and share in the growth of the underlying

business, above and beyond the share price's appreciation. (Hicks, 2018)

Dividends as defined[ CITATION Dav16 \l 1057 ] are payouts that some

companies make to shareholders as a return on their investment. The money

paid comes from a company’s earnings and it is generally seen as a refelction of

the company’s pas performance as well as its potential for the future. Older,

more established companies are more likely to pay dividends than new firms.

Moreover, dividends are often paid quarterly at a pre-announced rate that gives

shareholders a preditable payout for that quarter, regardless of the daily share

price fluctuations, which are lower than ordinary income tax rates.

In the journal written by [ CITATION Mor15 \l 1057 ] investors seem to be

rediscovering the power of dividends as an important element in the pursuit of

long-term total returns. If a company has a long history of paying a dividend and

is very likely to continue to do so in the future, then it is highly likely that

management will begin each new year by first deciding the dividend payout and

then thinking about how best to use the rest of the free cash flow. This leaves no

room for vanity projects or frivolous uses of shareholders capital. A focused

management team that uses the cash available to them efficiently is central to

creating a well run - and profitable - company that is able to grow and thrive in

the future. Steady and constantly growing dividends can give a good indication
 21

that these elements are in place. Dividend payments can act as a useful

barometer to identify companies that are disciplined and efficient in their capital

allocation and cash flow management. There exists an argument, however, that

companies who pay a dividend are just struggling to find new growth

opportunities and uses for their cash.

However, in the early stages of a company’s life it is quite right that cash is

used to establish the business. It is often right that the company continues to re-

deploy cash into the business as it moves through the early growth phase and

into the maturity phase. Once at maturity, however, when competition has

entered the market place and the opportunities for such high growth have

diminished, it is entirely sensible that the company takes stock, and carefully

decides to allocate cash to only those projects where it can achieve high returns -

and gives the rest back to shareholders.[ CITATION Mor15 \l 1057 ] In

conclusion, the power of dividends from equity investing has never been

diminished and has in fact been slowly and surely working away, behind the

scenes, adding not just appreciation in the form of total returns but the ability to

mitigate the effects of both market falls and inflation.

In relation to this, investors should always evaluate a company on a total

return basis that includes both capital growth and dividend income. Theyalso

tend to evaluate the macroeconomic indicators that would increase the stock

market return significantly. (Kvietkauskienė & Plakys2, 2013) The ability to issue

stock is critical to a business because stocks reflect an important source of

 22

capital used to raise cash, which also provides an alternative to debt financing.

(Shaftoe, 2017)

Moreover, dividends would not be possible without the divident policy

established with the company. At a macro level, dividend decisions of the

corporate sector are important as much they determine whether the individual

shareholders as a class can expect to get what they want as return on their

investments and thus to what extent savings of the households may be

channelised into investment in the corporate sector. The policy is essential to

managements as well as stock investors. Therefore, dividend policy would be an

important part of the whole financial strategy of the company. For investors, the

profit targets for their portfolios should be based on the dividend policy of the

company because dividend is one of income sources. The selection of an

appropriate dividend policy for companies has an important role in management

and investment. [ CITATION Ngu13 \l 1057 ]

In conclusion, O'Byrne discussed shareholder value is a constant concern

of management and a key obective of most long-term incentives plans. The stock

returns is a measure of management performance for compensation decisions

where high performing level companies are expected to give a return higher than

those of new established companies.

Retained Earnings

According to Peavler (2018) retained earnings, sometimes known as

accumulated earnings, earnings surplus or unappropriated profit, shown on a

company's balance sheet under Shareholders' Equity. It represents the part of

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net income or net profit, which is on the company's income statement, that is not

paid out as dividends, but is retained in the company. Retained earnings are

often reinvested in the company to use for projects such as research and

development, investment in a new warehouse, purchase of additional or better

equipment, or for paying off debt.

Retained earnings are usually treated as a cumulative number over the life

of a company. In other words, these are profits that have remained undistributed

to shareholders. (Peavler, 2018)

Moreover,retained earnings are an important source of internal orself

financing by a company. The savings generated internally by a company in the

form of retained earnings are ploughed back into the company for diversification

of its business. Retention of earnings by companies reduces their dependence

on funds from external sources in order to finance their regular business needs.

In order for a company to grow ,develop and expand, retained earnings

have to be used for the accumulation of assets that generate income for the

company. When income is generated it gives a company the means for

expansion. . Potential growth opportunities would place a greater demand on

internally generated funds. The importance attached to corporate income

retention in enhancing the growth of firms has been the driving force for many

study [ CITATION Thi13 \l 1057 ] which analyses potential variables that would

affect retained earnings and change in retention behavior among companies

differing in their growth levels.

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Hence, there are many factors that affect entity’s retained earnings as

stated in the column [ CITATION Fac18 \l 1057 ], these affect could make it

increase or decrease accordingly. The primary element that affect retained

earnings are net income/ net lost and dividend payments.If the entity make a lot

of profit and subsequently net income, then the earnings will be increasing

eventually. Others factors that affect retained earnings are sales, cost of goods

sold, interest expenses, and some adjustments that could affect the opening

balance of retained earnings.

Retention ratio on the other hand, is the percentage of the profit that the

company keeps instead of paying profits out as dividends. The retention ratio is

the opposite of the payout ratio. The payout ratio + the retention ratio will equal

100%.The retention ratio is important in showing how a company reinvests in its

operations in order to grow. There are numerous reasons that companies can

have high or low retention ratios. Companies with low retention ratios are value-

orientated companies where the board and management may own stock and pay

dividends to themselves (cynical view) or else the company do not have any

investment projects that are worth pursuing. While companies with high retention

ratios has a high growth company; they use the money to invest in other projects

and the companies do not have positive cash flow or positive earnings.

[ CITATION Ret18 \l 1057 ]

Moreover, retained earnings can be expressed in a ratio as follows:

Retention Ratio = Retained Earnings

Net Income
 25

Retained earnings represent a useful link between the income

statement and the balance sheet, as they are recorded under shareholders’

equity on the balance sheet. This reinvestment into the company aims to achieve

even more earnings in the future.

When sizing up a company's fundamentals, investors need to look at how

much capital is kept from shareholders. Making profits for shareholders ought to

be the main objective for a listed company and, as such, investors tend to pay

the most attention to reported profits. Sure, profits are important. But what the

company does with that money is equally important.[ CITATION Mor15 \l 1057 ]

Typically, portions of the profits is distributed to shareholders in the form of

dividends. What is left over is called retained earnings or retained capital.

[ CITATION Mor15 \l 1057 ]

In broad terms, capital retained is used to maintain existing operations or

to increase sales and profits by growing the business.Decent returns for even the

most patient investors can be elusive. For those forced to constantly repair and

replace costly machinery, retained capital tends to be slim.[ CITATION Mor15 \l

1057 ]

Some companies need large amounts of new capital just to keep running.

Others, however, can use the capital to grow. When you invest in a company,

you should make it your priority to know how much capital the company appears
 26

to need and whether management has a track record of providing shareholders

with a good return on that capital.

Additionally, it's a running historical tally of net earnings not paid out to

shareholders. All of a company's retained earnings end up in two places: cash or

equivalents (including marketable securities), or invested back into the business.

Depending on the company, retained earnings should grow significantly over

time, but this should also be reflected in increased assets, as the company uses

retained earnings to invest in new equipment and property, develop new

technology, and acquire competitors. These things (in theory, if not always in

practice) add value to the business and make its ability to generate profits

stronger. To summarize, cash is often a product of retained earnings, but it's not

where most of those retained earnings will end up over time as companies

reinvest earnings in the business. [ CITATION Hal15 \l 1057 ]

On the other hand, net income is the total amount you earn (typically over

the course of a year) before expenses (Valix&Valix, 2017). Any changes or

movement with net income will directly impact the Retained Earnings balance.

Factors such as an increase or decrease in net income and incurrence of net

loss will pave the way to either business profitability or deficit. (CFI, 2018)

Net income can be seen at the Financial Performance which in the

broader sense refers to the degree to which financial objectives being or has

been accomplished and is an important aspect of finance risk management. It

is the process of measuring the results of a firm's policies and operations in

 27

monetary terms. It is used to measure firm's overall financial health over a given

period of time and can also be used to compare similar firms across the same

industry or to compare industries or sectors in aggregating. The interest of

various related groups is affected by the financial performance of a firm. The type

of analysis varies according to the specific interest of the party involves: trade

creditors who are interested in the liquidity of the firm (appraisal of firm’s

liquidity); bondholders interested in the cash-flow ability of the firm (appraisal of

firm’s capital structure, the major sources and uses of funds, profitability over

time, and projection of future profitability); investors who are interested in present

and expected future earnings as well as stability of these earnings (appraisal of

firm’s profitability and financial condition); and the management who is interested

in internal control, better financial condition and better performance (appraisal of

firm’s present financial condition, evaluation of opportunities in relation to this

current position, return on investment provided by various assets of the

company). [ CITATION Ver17 \l 1057 ]

The financial performance of the corporations is among the major

concerns for the users of financial statements. The way of measuring financial

performance of corporation is currently one of the most debated topics in the

business environment. Accounting theorists have put forward opinions for the

nature of the income earned by the corporations and developed methods to

accurately measure the net income of the corporation. [ CITATION Ozc15 \l 1057 ]

Thus, making net income is better way in forecasting future operating income of

the company.
 28

Retained Earnings and Stock Returns of Top 10 Publicly-Listed Real Estate

Companies in the Philippines

Private companies can choose to do what they want with their retained

profits, but publicly-held companies have a potential financial dilemma. For most

investors, their immediate concern when evaluating a company is the amount of

profit the company's making. Beyond that, investors want a payoff to reward

them for their investment in the company, in the form of either in dividends or an

increasing stock price.

To some extent, these two parties desires conflict. A company that

delivers outstanding dividends quarter after quarter may accomplish this

sacrificing spending on the kind of reinvestment in the company that allows it to

grow. But it can also happen that a mature, stable company that never declares a

dividend can turn off investors who may wonder if there's an underlying structural

problem in the absence of dividends. (Peavler, 2018)

Investment in equity shares is considered as one of the major avenues of

investment that has the potential of yielding considerable returns to investors. It

is also a source of finance for the capital requirements of firms. Returns from

such equity investments are however subject to vary, depending upon various

factors such as the performance of the particular stock, the market conditions,

etc. Knowledge of such factors and their possible impact on share prices is highly

appreciable as it would help investors make wise investment decisions and

enable firms to enhance their market value.[ CITATION Ruh14 \l 1057 ]

 29

On the other hand, if the company has any chance of growing, it must be

able to retain earnings and invest them in business ventures that, in turn, can

generate more earnings. In other words, a company that aims to grow must be

able to put its money to work, just like any investor.When evaluating the return on

retained earnings, you need to determine whether it's worth it for a company to

keep its profits. If a company reinvests retained capital and doesn't enjoy

significant growth, investors would probably be better served if the board of

directors declared a dividend [ CITATION McC18 \l 1057 ]. In conclusion, for

stable companies with long operating histories, measuring the ability of

management to employ retained capital profitably is relatively straightforward.

Before buying, investors need to ask themselves not only whether a company

can make profits, but whether management can be trusted to generate growth

with those profits. 

In practice, the dividend policy is formulated after weighing carefully the

delicate considerations rather than by adoption of precise mathematical

formulations. Theoretically, one may argue that a company should retain

earnings as long as their use can bring a return which is above the company’s

cost of capital. It should continue to the point at which the incremental return is

just above the cost of capital.[ CITATION Cha18 \l 1057 ]

Retention policy should be directed towards maximising the market value

of the ordinary share over the long run. Funds should be retained to the point that

the incremental rate of return for the company just exceeds the average rate of
 30

return for the industry. But the financial executive has to make a balanced

judgement between the requirements of the company for additional funds and the

needs of shareholders for regular income and capital appreciation.[ CITATION

Cha18 \l 1057 ]

The real estate industry’s steady growth in the past decades is attributed

to the increase in demand for residential and commercial properties driven by

various factors. (Ortiguero, 2018)

Landscape and the city skyline in the metro have changed so drastically

and substantially throughout the last three decades, which were marked by boom

and bust cycles, the onset of new trends, ideas and designs, as well as the entry

of more players, among others. Real estate services firms can be considered as

the most significant turning points and challenges that have had an impact on the

Philippine real estate industry. (Remo, 2017)

Hence real estates are changing as they have become more meticulous.

This is also why developers are ensuring that their plans and project concepts

are attuned to their customers’ demands, by offering them world-class real estate

developments. Companies will be assured of continuous inventories to sell. Just

continue to prospect and qualify and make sure to offer the best available

affordable investment options in the market. Focusing on this objective will

unquestionably reap positive sales results. (Magpoc, 2017)

Experts expect developers to continue venturing into residential projects in

second-tier and third-tier cities all over the country, where demand primarily
 31

comes from end-user buyers. Opportunities are also seen in the popularity of e-

commerce, which is expected to drive warehousing and logistics demand.

(Ortiguero, 2018)

The stock has outperformed because many investors believe in its

business model, which is geared towards addressing geographical gaps in

retail Cristina Ulang, head of research at Manila-based First Metro Investment

Corp. “Investors bought the stock on what the company would or could do, not

on what it had. But I’d be cautious because of operational concerns,” said

Rens Cruz, an analyst at Regina Capital Development Corp. who has a hold

rating on the stock. The company is “still in a transition phase from one that

gets revenue from interim project to one that gets earnings from leasing.”

With this two parties’ desires conflict, real estate owners in the Philippines

may pay dividends or may accomplish this sacrificing spending on the kind of

reinvestment in the company that allows it to grow since real estate business is

known to bloom as the years passed by.

Research Literature

Since this study was concerned on identifying the effect of retained

earnings on the stock of top 10 publicly listed real estate companies in the

Philippines, the researchers perceived past studies which were considered

relevant to the study.

With regard to the study of Thuranira (2011) sought to establish the Effect

of Retained Earnings on the Returns of Firms Listed at Nairobi Securities. The

study followed a descriptive study design and used secondary data obtained
 32

from Nairobi Securities Exchange and the listed company’s annual reports for the

period 2009 to 2013. The data was summarized through excel spreadsheets and

analyzed using Statistical Package for Social Sciences. Regression analysis was

conducted to obtain coefficient of determination (R), Correlation Coefficient (R-

Square), P-value and F-tests statistics to measure the possibility of a relationship

between the two variables. The analysis involved a regression of stock returns

against retained earnings alone, and then another regression involving retained

earnings and three more variables; Dividend Yield, Net Asset Value per share,

Price to Book Value acting as the control variables. When stock returns were

regressed against retained earnings the results revealed that there is no

relationship between the two variables. The regression analysis involving

inclusion of the three control variables revealed that there is a very weak

relationship between the variables. Further, the results revealed that a simple

linear regression model describing the relationship between stock returns and

retained earnings was statistically insignificant. Also, the results revealed that the

Multiple Linear Regression model which included the control variables was

statistically significant. Nonetheless, in both cases, the results revealed that there

exists a very weak and insignificant relationship between retained earnings and

stock returns and the relationship is inverse since the coefficient corresponding

to retained earnings in the model was always negative. Therefore, the study

established that there is a very weak (insignificant) inverse relationship between

retained earnings and stock returns. The study concluded that retention of

earnings is irrelevant in influencing the amount of stock returns earned byof the
 33

investors of NSE listed firms. Furthermore, their relationship is insignificant and

inverse. The study recommends that the corporate organizations need not retain

unnecessarily too much earnings as it inversely influences the investors’ stock

returns. They should retain earnings only when there are investment projects

with a positive net present value. Also, the study recommends that capital

markets authority and the NSE should put emphasis on the stance; that the NSE

listed companies should endeavor to create shareholder value in all their

decisions including on earnings retentions. That is, the NSE listed firms should

retain earnings only when the organization has projects with a positive net

present value.

Another study conducted by Javed (November 2015) on the impact of

retained earnings on stock returns of food and personal care good industry listed

in Karachi Securities Exchange posits to identify the effect of retained earnings

on stock returns of food and personal care good industry listed in Karachi Stock

Exchange. The study used three sub variables of stock returns, i.e. capital

gain/loss yield, stock prices, cash dividend per share, and identify its relationship

with retained earnings. The analysis consists of seven active companies of food

and personal care good industry and used the data for a period of 2009-2014.

The study used convenience sampling of non- probability method and used linear

regression and Spearman’s correlation analysis. The study found a weak and

insignificant relationship between retained earnings and cash dividend per share

and capital gain/loss yield. The study also found a moderate positive and

significant relationship between retained earnings and closing price of stock. The
 34

study concluded that the retention of earnings has a weak and insignificant

relationship with stock returns. The study suggests that managers should try to

pay huge amount of dividends, as retention of earnings do not contribute in

enhancing the stock returns.

However, the study of Ball and associates (2017) in the Earnings,

Retained Earnings, and Book-to-Market in the Cross Section of Expected

Returnsdelve into what causes the relation between book-to-market and the

cross section of stock returns. Book value of equity consists of two main

components which contain different information about expected returns: retained

earnings and contributed capital. Retained earnings-to-market subsumes book-

to-market's power to predict the cross section of stock returns in pre- and post-

Compust at U.S. data as well as in international data. Contributed capital-to-

market has no predictive power. Retained earnings represent the accumulated

difference between earnings and dividends. It shows that retained earnings-to-

market's predictive power stems entirely from accumulated earnings. This study

conclude that retained earnings-to-market is comparatively free of the individual-

year accounting issues that affect current-period earnings yield, and

consequently is a good proxy for underlying earnings yield, which has a direct

conceptual link with expected returns.

Furthermore, the study of UK, Essays (November 2013) posits to identify

the relationship ofretained earnings and share price in Pakistan. For analysis, a

sample of 40 listed companies was taken from Karachi stock market. In this

research, variables data was taken from the period of 2005-2008. The
 35

expectation was that the Retained Earnings would be positively related to Share

Prices. That is, increases in retained earnings the firm will be associated with an

increase in the firm's stock price. By contrast, firms with relatively higher earnings

volatility or higher leverage will tend to display higher price volatility.Simple

Linear Regression technique was used to analyze the relationship between share

price and retained earnings. A positive relation was found between retained

earnings and stock price.

Another study by Masum (2014), the dividend policy and its impact on

stock price, examined what kind of relationship exists between dividend policy

and stock market returns of private commercial banks in Bangladesh, and to

what degree the returns on stocks can be explained by their respective dividend

policy for the same period of time. Various theories related to dividend policy are

tested in various parts of the world with different results and findings. Various

other articles are reviewed, written in Bangladesh and abroad to see the

significance of dividend policy on the stock prices and to compare the results of

this research with those conducted earlier. Sample size is large i.e. all the listed

commercial banks of Dhaka Stock Exchange so the results are reliable and valid.

Panel data approach is used to explain the relationship between dividends and

stock prices after controlling the variables like Earnings per Share, Return on

Equity, Retention Ratio have positive relation with Stock Prices and significantly

explain the variations in the market prices of shares, while the Dividend Yield and

Profit after Tax has negative, insignificant relation with stock prices. Overall
 36

results of this study indicate that Dividend Policy has significant positive effect on

Stock Prices.

On the other hand, the study of Mohammad and associates (2012)

aboutthe impact of dividend policy on share price volatility in the Malaysian stock

market examined the relationship between dividend policy and share price

volatility with a focus on consumer product companies listed in Malaysian stock

market. For this study, a sample of 84 companies from 142 consumer product

companies listed in main market of Bursa Malaysia were selected and the

relationship between share price volatility with two main measurements of

dividend policy, dividend yield and payout,were examined by applying multiple

regression for a period of six years from 2005 to 2010. The primarily regression

model was expanded by adding control variables including size, earning volatility,

leverage, debt and growth. The empirical results of this study showed significant

negative relationship between share price volatility with two main measurements

of dividend policy which are dividend yield and dividend payout. Moreover, a

significant negative relationship between share price volatility and size is found.

Based on findings of this study, dividend yield and size have most impact on

share price volatility amongst predictor variables.

Additionally, the study of Mulama (October 2014) examined the

determinants of retained earnings in Comapanies listed at Nairobi Securities

Exchange. The factors which were tested are; firm size, dividend payout, growth

opportunities, profitability, tangibility of assets, and leverage. Both the

longitudinal and cross-sectional research designs were employed to enhance the

 37

study of companies listed under different segments during the period between

2009 and 2012. Only 41 non-financial companies listed at NSE were studied

while financial companies were excluded from the study to remove any

anomalies associated with this sector which is highly regulated by the central

bank prudential on issues of liquidity, asset and capital holding, and provision for

bad debts among other factors. Secondary data from published reports and

financial statements at NSE was used in this study. Data was collected by use of

data collection sheet. The study employed a multiple regression data analysis

technique where tools of SPSS were used. The research findings indicated that

there was a weak positive relationship between profitability and retained

earnings. The study also revealed that both the firm size and growth

opportunities had a weak negative relationship with the retained earnings.

Dividend payout ratio was found to have little or no relationship with the retained

earnings. The study results showed a strong negative relationship between

leverage and the retained earnings. This supported both the pecking order theory

and trade-off theory which predict a negative relationship between leverage and

retained earnings. Last but not least, assets tangibility was found to have a

significant positive relationship with retained earnings. Therefore, it is evident that

the change in retained earnings is mainly influenced by the leverage and

tangibility of assets and some factors other than those ones tested in this study.

Moreover, the study Odiero (2008) established the effect of Growth of

Earnings and Stock Prices on the Price- Earning Ratio of Firms Listed at the

Nairobi Securities Exchange.The study adopted a descriptive survey design. It

 38

involved a census survey of all the companies listed at the NSE during the years

2003 – 2012. These were subdivided into 10 subsets corresponding to the 10

sectors of the Exchange. Secondary data was obtained from the NSE

Handbooks covering the periods 2002 – 2006, 2003 – 2007 and 2008 – 2012

which provided 5-Year company financial performance summaries. The data

collected was summarized into yearly weighted averages for the test variables for

the NSE for the years 2003 – 2012. This summary data was then analyzed using

descriptive statistics. Multivariate correlation and regression analyses were used

to test the relationship between the price earnings ratio and the growth of

earnings and stock prices. The study found that there existed a moderate but

positive association between the price earnings ratio and the growth of stock

prices, but an insignificant relationship between the price earnings ratio and the

growth of earnings. However, it found a moderate to strong positive association

between the growth in the price earnings ratio and the growth in stock prices, and

a moderate and negative association between the growth in price earnings ratio

and the weighted average annual riskless rate (the 91-day T-Bill rate). The

association between the growth in price earnings ratio and the growth in earnings

was not insignificant. The study found that these associations were more

pronounced for shorter periods, i.e. 2003 – 2007 and 2008 – 2012, than for the

entire 10 year period, and more pronounced for 2008 – 20012 than for 2003 –

2007.The study concluded that the associations determined for the NSE reflected

similar empirical studies of other exchanges, and they also suggested a an

efficient market in the weak form, with growth rather than value shares
 39

dominating the exchange. The study recommends reform of the NSE to move it

to an efficient market in the semi-strong to strong form. It also suggests that

further research be undertaken using more refined data to authenticate these

findings.

Another study conducted by Yemi and Seriki (2018) about the

retainedearnings and firms’ market value, wherein, the study examined the

effects of retained earnings on market value of listed firms after controlling for

earnings per share, dividend payout and financial leverage in the context of the

Nigerian stock market. The sample data was extracted from 75 non-financial

firms listed on the Nigeria stock Market during the period 2003 to 2014. The

unbalanced panel data (cross-sectional and time series) used to examine the

relationship were obtained from the annual financial statements of the various

firms. Two basic approaches descriptive and multiple regression models were

used to determine the relationship between the underlying variables. The results

indicated a positive and significant relationship between retained earnings,

earnings per share, dividend payout and value of firms while market value is

positively but non-significant associated with financial leverage. The study

reduces the dearth of previous research on dividend policy in emerging markets

regarding the empirical relationship between retained earnings and market value

of firms.

Additionally, the study conducted by Tirmizi [ CITATION Tir13 \n \t \l 1033

] test empirically an adopted but modified version of a firm valuation equation

derived mathematically by Sethi and Michael (2002). The adopted modeled

 40

equation was modified to represent retained earnings based on firm valuation

equation which included retained earnings, firm value and shareholders wealth

as variables. This model was tested by analyzing the impacts of retained

earnings on firm value and shareholders wealth. Also, impact of firm value on

shareholders wealth was analyzed. Primary data was collected from randomly

selected listed Pakistani manufacturing firms by means of a questionnaire. Factor

analysis was used to validate the instrument and ordinary least squares linear

regression analysis was used to test the formulated hypotheses. The major

findings suggested that retained earnings had played a vital role in expansion

activities and benefited sample firms in achieving desired growth. As value of

sample firms was enhanced and shareholders wealth was maximized due to

investment and reinvestment of retained earnings in value enhancing projects.

Thus, results of the study validated the strength of retained earnings based firm

valuation model in Pakistan.

Synthesis

The reviewed research literature helped the researchers gain insights

and understanding regarding the study conducted, the main purpose of which is

to identify the effect of retained earnings on the stock returns of top 10 publicly

listed real estates in the Philippines. Moreover, the studies handed important

insights to the researchers.

The studies of Javed (2015) and Thuranira (2011) are the most related

studies in this research. The studies of the two were basically the same with the

present study in terms of its objectives, used secondary data as well as

 41

regression analysis in testing the relationship of retained earnings and stock

returns. Descriptive research design was used, whereas Javed used explanatory

research design. The present and past study differed in the respondents since

the former used top 10 publicly listed real estate companies while the latter,

Javed used food and personal care good sector and Thuranira used all firms

listed at the Nairobi Securities Exchange. Present and past study differed in the

location in conducting the study.

The study of Ball and associates (2017) to some extent was similar to the

present study. The difference was that aside on the retained earnings,

contributed capital was also examined in relation with the stock returns. The

studies of Javed (2015) and Thuranira (2011) are the most related studies in this

research. The studies of the two were basically the same with the present study

in terms of its objectives, used secondary data as well as regression analysis in

testing the relationship of retained earnings and stock returns. Descriptive

research design was used, whereas Javed used explanatory research design.

The present and past study differed in the respondents since the former used top

10 publicly listed real estate companies while the latter, Javed used food and

personal care good sector and Thuranira used all firms listed at the Nairobi

Securities Exchange. Present and past study differed in the location in

conducting the study.

With regard to the study of Masum (2014) and Mohammad and associates

(2012), present and past studies were similar in terms of statistical method and

secondary data used. However, former used real estates as the subject while
 42

the latter, Masum used manufacturing companies and Mohammad used banking

industry.

As for the study conducted by UK, Essays (November 2013), Mulama

(October 2014), Odiero (2008),Yemi and Seriki (2018) and Tirmizi [ CITATION

Tir13 \n \t \l 1033 ], these studies used descriptive research design as the

research design, secondary data and statistical method in similar with the

present study. Present and past study differed on the respondents and the

location in conducting the study. Therefore, despite their similarities to the

present study, it can be said that the study has a personality of its own and is nor

a duplication of any of the other studies.

 43

Chapter III
RESEARCH METHODOLOGY

This chapter presents a detailed discussion of the research design,

respondent of the study, sampling design, the data gathering instrument utilized

in the conducting the research, data analysis adopted as well as statistical

treatment of data employed as well as the assumption of the study. These factors

are very important in order for the researchers to properly analyze, interpret and

fairly present the gather information.

Research Design

Sekaran & Bougie (2010) defines research design as a systematic

arrangement of the measures, factors and the tools applied in the collection and

analysis of data in order to achieve the objectives of a study in the most efficient

and effective way. Kothari (2004) advances that a research design directs the

researcher in that it provides him or her with guidelines on how to collect, to

analyze and interpret the data in a coherent manner.

This study followed a descriptive research design as the study sought to

determine the empirical relationship between earnings retentions and stock

performance of the top 10 real estate listed firms. A descriptive study design can
 44

be used to find out the present state of affairs (Saunders, Thornhill, & Lew, 2009)

in relation to the effect of earnings retentions on stock performance.

Furthermore, the descriptive study design is preferred since it is suitable

and is applicable in researches to be carried out within little time and with lean

cost constraints (Mugenda & Mugenda, 2003). Moreover, it is dependable, valid

and generalizable in this research since it is appropriate for the purpose of data

collection and analysis, because it is appropriate regardless of whether the data

is qualitative or quantitative (Sekaran & Bougie, 2010).

Respondents of the Study

This study selects the top 10 real estate companies listed in the

Philippines Stock Exchange based on capitalization. Real estate firms are

considered as the most significant turning points and challenges that have had

an impact on the Philippine real estate industry. (Remo, 2017) They had been

changing as they have become more meticulous. This is also why developers are

ensuring that their plans and project concepts are attuned to their customers’

demands, by offering them world-class real estate developments. Companies will

be assured of continuous inventories to sell. Just continue to prospect and qualify

and make sure to offer the best available affordable investment options in the

market. (Magpoc, 2017)

The study used purposive sampling of a non-probability method. This

method of sampling is a sampling technique in which the researchers relies on

own judgment when choosing members of the population to participate in the

study.
 45

Sampling Design

This study used secondary data. Secondary data is the data that is already

available having been collected in the past by other parties other than the

researcher for the purpose of their current study (Mugenda&Mugenda, 2003). It

has the advantages of being readily available, hence easy to obtain saving time

and monetary resource.

However, it is criticized for likelihood of being obsolete. For the purpose of

this study, secondary data was the only applicable option since the study sought

to establish the relationship between stock returns and retained earnings; which

could only be possible by studying past data. This could only be possible by

analyzing the trends and the relationship between the variable which could be

established by studying secondary data.

The required data sets were the stock prices, periodic dividends, and

retained earnings for each of the top 10 real estate listed companies for the

period between 2013 and 2017. The data was obtained from Philippine Stock

Exchange. The impact of out-datedness could not arise because the data

considered spanned within the last 5 years between 2013 and 2017.

Data Analysis

The researchers of the study performed some procedures in order to

achieve the objectives of this work. In order for the researchers to have better

results, they had to look for the data that are related to their study. In achieving

those data, they visited the libraries of Batangas State University, and University

of Sto. Tomas. They searched for the list of the top ten of publicly listed real
 46

estate companies in the Philippines. The researchers tried to look for the

financial statements of the top ten publicly listed real estate companies through

the use of internet. The obtained data (dividends for the period and the beginning

and end of period stock prices) were used to compute the stock returns which

solved by adding the appreciation in the price plus any dividends paid, divided by

the original price of the stock – the dependent variable for each company for the

last five years. The independent variable –periodic retained earnings divided by

the annual income for the period, was also obtained from company annual

reports. The study used the annual reports found in internet of each listed firms

from the period between 2013 and 2017.

The reliability and validity of the data obtained from several sources such

as Philippine Stock Exchange, Wall Street Journal, websites of the publicly listed

real estate companies is the most critical aspect ensuring the truthfulness of

results of the study.

Statistical Treatment of Data

The Statistical Package for Social Sciences (SPSS) used in the statistical

analysis of data. The following are the specific statistical tools that were used:

R and R - Square. This was used to determine the correlation of the

predictors which are the capitalization, years of business existence, retention

ratio , number of employees and total assets

ANOVA. This was used to determine if there is significant difference on

dependent variable stock returns when grouped according to profile.

 47

Pearson’s Correlation. This was used to determine if there is significant

relationship between retained earnings and stock returns.

Mean. This method was used by the researchers for the descriptive

statistics on the profile of the publicly listed companies

Standard Deviation. In analyzing the results in each financial statement,

the researchers used standard deviation.

Assumptions of the Study

While conducting the study, the researchers were able to formulate some

assumptions. The researchers assumed that among the publicly listed Real

Estate Companies in the Philippines, SM Prime Holdings, Inc. showed as the

largest Philippine real estate developer since they had the biggest capitalization

as compared to others. They also assumed that the variables used in the study

helped in comparing the financial performance of the publicly listed companies.

In addition to this, they also assumed and considered that the data obtained were

dependable and the statistical tools used in the study were appropriate. The

reliability and validity of the data used were also assumed in this study.
 48

CHAPTER IV
PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA

This chapter deals with the presentation, analysis and interpretation of

data from the financial statements and annual reports of Top 10 publicly listed

real estates companies in the Philippines. The data presented were analyzed

and interpret in response to the problem raised in the study. In order to have a

clear analysis and interpretation, tables and graphs were presented.

1. Business Profile of the Respondents

This part of the study presented a brief description of the publicly listed

real estates companies’s capitalization, number of employees, number of years

in operation and total assets. The researchers established the following to

provide the readers additional information about real estates companies.

 49

1.1 Capitalization

Source: Financial Times. https://markets.ft.com

Figure 2
Graphic Representation on the capitalization of publicly listed real estate
companies
Figure 2 shows the graphic representation of the capitalization of the top

10 publicly listed companies in the Philippines. SM Prime Holdings, Inc. leads

with a total amount of P1,042,540,264,153.00while Shang Properties, Inc is the

lowest with a capital of P15,340,261,244.00.

N Minimum Maximum Mean Std. Deviation

Capitalization P15,340,261, P1,042,540, P227,760,459, P345,458,503,
10
244.00 264,153.00 271.1000 070.89920
Valid N
10
(listwise)

Table 1
Descriptive Statistics on the capitalization of publicly listed real estate
companies

As seen in Table 1, the minimum amount hold for capitalization is

 50

P15,340,261,244 that is from the SM Prime Holdings while the maximum

amount is P 1,042,540,264,153 was from the Shang properties Inc. It also

shows the central tendency of P 227,760,459,271.10. The year 2017 for SM

Prime Holdings, gave effect to 49 residential projects, 106,181 residential units

while Shang Properties 3 residential projects namely The Shang Grand Tower

Project in Makati, St. Francis Shangrila Place Project and Shangrila Place

project in Mandaluyong with 1,510 residential units.

A real estate business is the producing, buying and selling of real estate

properties and in order to establish this kind of business, it needs a lot of

capitalization. Initialy, the costs intended for the business was spent on opening

up an office in a prime area, hiring of staffs, and advertising. The amount of

capital required also depends upon ability to buy properties at advantageous

prices, entrepreneurial skills to improve the properties in a cost-effective way,

and the risk involved because the riskier the project, the more capital needed to

cover challenges. [ CITATION Gur18 \l 1033 ]

1.2 Number of employees in the business

 51

Source: Financial Times. https://markets.ft.com

Figure 3
Graphic Representation on the number of employees of publicly listed real
estate companies

Figure 3 shows the summary in bar graph of the number of employees.

SM, Prime Holdings, Inc. holds the most number of employees wich is 8,990

people while Megaworld Corporation and Belle Corporation both had the lowest

number of employees resulting to 139 people.

N Minimum Maximum Mean Std. Deviation

Employees 10 139.00 8,990.00 1,564.7000 2,679.14535
Valid N (listwise) 10

Table 2
Descriptive Statistics on the number of employees of publicly listed real
estate companies

Table 2 presents the number of employees the respondents are engaged

to with a minimum of 139 people to a maximum of 8,990 people. Generally for

the publicly listed real companies, it takes 1,564 employees to keep the

business going. SM Prime Holdings hold the highest number of employees

since it holds the largest number in projects, specifically the two large scale

tourism projects: Tagaytay Highlands, an exclusive mountain resort, golf club

and residential complex, covering some areas of Cavite and Batangas

provinces; and the 40-hectare Pico de Loro, which is the Phase 1 of Hamilo

Coast project, a premier and sustainable leisure destination in Nasugbu,

Batangas. For a real estate business, it does need a lot of people to create

products unlike the regular commercial business. [ CITATION SMP18 \l 1033 ]

 52

However, Belle Corporation has the lowest number of employees because they

primarily focus on Tagaytay Highlands and Midlands, Belle’s premier mountain

resort complexes, continued to be among the top leisure and resort destinations

away from the hustle and bustle of Metro Manila. In 2017, Belle’s real estate

development and related activities made a strong showing with P823 million in

revenues, a strong 38% increase from P596 million in 2016.[ CITATION Bel18 \l

1033 ]

Real estate business is more on advertising their products to the public.

According to [ CITATION Kim18 \l 1033 ] real estate business has three major

activities; house recruiting: real estate agent establishes a contact with the

seller of a real estate property in order to represent him to the potential

buyers, visit that real estate agent shows the real estate property to the

potential buyers; and sale that help the buyer and the seller of the real estate

property making the transaction. From this, employees on real estate business

are not of quantity but the the quality they have as an asset to the company.

Additionally, the differences in the small- and large-business workforces

are, at least in part, a result of the inherent differences in small and large firms.

Small firms are often younger (indeed, they are sometimes recent startups),

more likely to be in rural areas, and more apt to be in industries with lower

economies of scale, such as services. Small-business employment may be a

less important indicator of entrepreneurship because one plausible

explanation for the consistently higher shares of self-employment and small-

 53

business employment in the rest of the world’s rich economies is that all have

some form of universal access to health care. The high cost to self-employed

workers and small businesses of the private, employer-based health care

system may act as a significant deterrent to small start-up companies, an

experience not shared by entrepreneurs in countries with universal access

to health care. [ CITATION Sch09 \l 1057 ]

1.3 Years of business existence

Source: Financial Times. https://markets.ft.com

Figure 4
Graphic Representation on the years of business existence of
publicly listed real estate companies

As shown in figure 4 which is the graphic representation of the years in

business of the top 10 publicly listed real estate companies in the Philippines,

Starmalls, Inc. had been up for 49 years while both 8990 Holdings, Inc. and
 54

Achor Land were 14 years ago established making them the youngest among

them.

N Minimum Maximum Mean Std. Deviation

Years of existence 10 14.00 49.00 30.3000 11.54749
Valid N (listwise)
10

Table 3
Descriptive Statistics on the years of business existence of
publicly listed real estate companies

Table 3 shows the number of years from when the publicly listed real

estate companies are established. The minimum year is 14 years while the

maximum year is 49 years meaning that these real estate business are averagely

over 30 years from now. Starmalls Inc. has been up for 49 years with different

achievements who conducts all of its operations through its subsidiaries,

Masterpiece Asia Properties, Inc. and Manuela Corporation. The subsidiaries are

involved in the acquisition of undeveloped land, the planning and design of

developments, the securing of regulatory approvals for development and sale or

lease, the supervision of land development and construction and the marketing

and selling/leasing of its products. [ CITATION PSE18 \l 1033 ] On the other hand,

8990 Holdings Inc. and Anchor Land Holdings, Inc. has been up with 14 years

with 25 projects by the latter and 14 projects by the former.

The bloom of real estate business in the Philippines is influenced by the

vast innovation on the modern world. The real estate industry’s steady growth in

the past decades is attributed to the increase in demand for residential and
 55

commercial properties driven by various factors (Ortiguero, 2018). Real estate

services firms can be considered as the most significant turning points and

challenges that have had an impact on the Philippine real estate industry (Remo,

2017).

1.4 Total Assets

Total assets are the sum of all the current and non-current assets and

must be equal to the sum of total liabilities and stockholder’s equity. Assets in

layman’s term are the valuable resources owned by the entity.

Total Assets of Publicly Listed Real Estate Companies

700000000
600000000
500000000
400000000
300000000
200000000
100000000
0
c. c. . . . .
on nc on on on nc nc nc
,s In In
ra
ti , I
ra
ti
ra
ti
ra
ti , I , I , I
ng nd all
s gs gs es
ldi a La r po m r po r po r po ld in
ld in erti
o al Co a r Co Co Co p
eH Ay ld St d d le Ho Ho P ro
r n n e l 9 0 d
im o La La B 89 an ng
Pr gaw ns est o rL ha
e o v S
SM M ns in ch
obi Fil An
R

Source: Financial Times. https://markets.ft.com

Figure 5
Graphic Representation on the total assets (in thousands) of publicly listed
real estate companies
 56

It showed that Ayala Land Inc. has the largest amount of total assets

among the top ten publicly listed real estate companies in the Philippines. It has

an aggregate amount of P 538,417,598,000 of which majority was composed of

non-current assets amounting to P 355,431,379,000. Therefore, the total current

assets of Ayala Land as for the year end 2017 were P 218,560,955,000 among

which composed were Accounts and Notes Receivable amounting to P

98,311,499,000 and Inventories amounting to P 62,192,378,000. The non-current

assets were extremely composed of Land and Improvements with an amount of

P 94,276,655,000 and Investment Properties with an amount of P

134,616,390,000.

On the other hand, it showed that Anchor Land Holdings, Inc. has the

lowest amount of total assets. It has an aggregate amount of P 25,828,088,516

of which majority was composed of current assets amounting to P

13,411,915,725. Therefore, the total non-current assets of Anchor Land

Holdings, Inc. as for the year end 2017 were P 12,416,172,791 among which

composed were Investment Properties amounting to P 7,711,201,300 and

Receivables-net of current portion amounting to P 3,697,454,043. The current

assets were extremely composed of Real estate for development and sale with

an amount of P 7,457,616,127 and Receivables with an amount of P

3,119,503,219.

N Minimum Maximum Mean Std. Deviation

 57

Total assets P258280 P19465

10 P573992334 P 208490208.95
88.00 1265.90
Valid N (listwise) 10
Table 4
Descriptive Statistics on the total assets (in thousands) of publicly listed
real estate companies

As shown in table 4, the assets of the publicly listed real estate

companiesrange from P 25,828,088,516 to P 573,992,334,000. Within years of

existence are generally P194,651,265.90 having a total assets, in thousands

over which they have expended over time to yield benefits for the owner. Ayala

Land Inc. holds the maximum amount of total assets because they strive to

prioritize hiring within the community, city, or province where they are located

and give opportunities to local businesses and brands. They currently present in

55 growth centers across the Philippines expanding the role as catalysts and

engines of growth through a large-scale, masterplanned mixed-use

communities. These can be remarkably seen in the continued contributions in

employment in Metro Manila and provinces in Luzon, and the past five-year

growth in investments in Palawan, Western and Central Visayas, and in

Northern and Davao regions in Mindanao. [ CITATION Aya18 \l 1033 ] However,

Anchor Land Holdings, Inc., since it had recently started has the lowest total

assets from its real estate-related revenues, P1.19 billion. These were

generated mostly by the flagship residential projects led by Monarch Parksuites

at the Bay City and three properties in Binondo: Anchor Grandsuites,

Princeview Parksuites and Oxford Parksuites. (Anchor Land)

 58

The large amount of total assets is from its real assets because of its

nature in the buying and selling of estate properties. Accordingly, real estate

cycles have been a significant underlying reason for the financial successes and

failures of real estate investments throughout history. Cycles are a major

determinant of success or failure because of their pervasive and dynamic

impacts on real estate returns, risks and investment values overtime—impacts

that should not be ignored or over-simplified. Because of this recognition, as well

as a growing industry focus on real estate as a distinct asset class that deserves

increased portfolio allocations, investors and portfolio managers are placing

increased emphasis on the strategic and decision-making implications of real

estate cycle theory and analysis. Moreover, the inflexible, immobile condition of

property makes it highly essential to convert the internal corporate one-way road

of commandinto two-way-traffic. [ CITATION Gla13 \l 1033 ]

2. Trend of Retained Earnings

Retention Ratio of Publicly Listed Real Estate Companies from 2013-2017

8.11 8.28
7.41
6.54
5.88
5.11
4.39
3.81
2.19 1.97

c. c. n c. on c, on In
c
In
c
In
c
,s In , In a tio s, In ati , In ati s, s , s,
d d
ng an po
r all po
r
an po
r
in
g
in
g
rti
e
ldi L r r m r t L or ld ld pe
o
ya
la Co ta Co ve
s C Ho Ho o
eH A r ld     S nd in lle 9 0 nd g Pr
im      . La Fi l e
Pr 2. wo 4
ns .   
B 89 La
ha
n
M ega o 6 .    7 .    hor . S
ns 8 c
   
S
   
M bi An 10
1. 3 . R o     
    9.
5.
 59

Figure 6
Trend of retained earnings using the Retention ratio of top 10 Publicly
Listed Real Estate Companies from 2013-2017

This figure shows the average retention ration of the top 10 publicly listed

real estate companies in the Philippines covering year 2013-2017. As shown in

this graph, these companies differed on how they retained their earnings.

Filinvest land, Inc. have the greatest retention of earnings with the ratio of 8.28

whereas 8990 Holdings, Inc. ratio have the smallest ratio with only 1.97.

Notably, retentions are a sacrifice made by equity shareholders. According

to Orwel (2010) they are internal sources of finance available to an organization

and have got many advantages. As internal source, retained earnings are readily

available for use. Also, retentions are cheaper than external equity, do not cause

ownership dilution, and have got a positive connotation as the stakeholders

perceive that the company has potential investment opportunities. However, they

have demerits in that retained earnings is a limited source of financing, and the

fact that they have a high opportunity cost since they are a foregone dividend by

equity holders (Chasan, 2012)

Accordingly, retention ratio is typically higher for growth companies that

are experiencing rapid increases in revenues and profits. A growth company

would prefer to plow earnings back into its business if it believes that it can

reward its shareholders by increasing revenues and profits at a faster pace than

shareholders could achieve by investing their dividend receipts. (Will Kenton ,

2017)
 60

Investors may be willing to forego dividends if a firm has great growth

prospects, which is typically the case with companies in sectors such as

technology and biotechnology. The retention rate for technology companies in a

relatively early stage of development is generally 100%, as they seldom pay

dividends. But in mature sectors such as utilities and telecommunications, where

investors expect a reasonable dividend, the retention ratio is typically quite low

because of the high dividend payout ratio. (Will Kenton , 2017)

The retention ratio may change from one year to the next, depending on

the company’s earnings volatility and dividend payment policy. Many blue-chip

companies have a policy of paying steadily increasing or, at least, stable

dividends. Companies in defensive sectors such as pharmaceuticals and

consumer staples are likely to have more stable payout and retention ratios than

energy and commodity companies, whose earnings are more cyclical.

Trend of Retention Ratios of Selected Publicly Listed Real Estate Companies

6.04
5.36 5.39
5.12 4.94

2017 2016 2015 2014 2013

 61

Figure 7
Trend of Retention Ratio of Publicly Listed Real Estate Companies from
2013-2017

As shown in this figure, the retention ratio of the top 10 Real Estates in the

Philippines based on the capitalization have highly increased from year 2013 to

2014, but in year 2015 it decreased and increased again in 2016 but slightly

decreased in year 2017. Generally, Companies with increasing retained

earnings is good, because it means the company is staying consistently

profitable. If a company has a yearly loss, this number is subtracted

from retained earnings. Also, increases in retained earnings are positive, though

high retained earnings may be viewed negatively by shareholders at times.

Factors that may cause the retained earnings increase or decrease are those

certain transactions related to the repurchase of corporate stock, declaration of

shareholders dividends and the income or loss from operations. Shown as a

separate line item on a company balance sheet, the portion of retained earnings

that are not intended for shareholder distribution are used by management to

reinvest back into the corporation. (Helstrom,2018)

Campbell (2012), notes that the prime idea behind earnings retention is

that the more the company retains the faster it has chances for growth. The study

conducted by Tirmizi and Ahmad (2013) analyzed the impacts of retained

earnings on firm value and shareholders wealth. The major findings suggested

that retained earnings had played a vital role in expansion activities and

benefited sample firms in achieving desired growth. As value of sample firms was
 62

enhanced and shareholders wealth was maximized due to investment and

reinvestment of retained earnings in value enhancing projects.

Regarding earnings retention, Chasan (2012), stated that there is always

a conflict in determining the ratio of earning to be retained. While the managers

of the company want a higher earnings retention ratio, the shareholders of the

company would think otherwise, as the higher the plowback ratio the more

uncertain their control over their shares and finances are.

Capital-intensive industries and growing industries tend to retain more of

their earnings than other industries because they require more

asset investment just to operate. Also, because retained capital represents the

sum of profits less dividends since inception, older companies may report

significantly higher retained capital than identical younger ones. This is why

comparison of retained capital is difficult but generally most meaningful among

companies of the same age and within the same industry, and the definition of

"high" or "low" retained capital should be made within this context. (Investopedia,

2018)

3. Trend of Stock Returns

 63

Stock Returns of Publicly Listed Real Estate Companies

1.46

0.21 0.13 0.17 0.23 0.22

0.04 0.09 0.01 0.03
c. c. on nc
.
on nc
, n c c c
,s In , In ati s, I ati , I atio s , In s , In s, In
g d r l r d r g g e
in La
n o al o
La
n o in in er
ti
ld a orp r m orp t o rp o ld o ld p
o l a C s o
eH Ay
a
rld
C St d ve eC H H r
ir m  .    o 4 .    L an ilin B ell 9 90 a nd n gP
F L
P 2 aw s         .   
8 r ha
SM eg son 6. 7. 8 c ho 0 .S
    M in n 1
1.     ob    A
3. R . 
    9
5.

Figure 8
Stock returns of Publicly Listed Real Estate Companies from 2013-2017

This figure shows the average stock return of the top 10 publicly listed real

estate companies in the Philippines covering year 2013-2017. As shown in this

graph, Anchor land have the biggest stock returns with the percentage of 146

whereas Belle Corporation have the smallest with only 1 percentage.

Common terms in relation to stock return are relative and absolute stock

performance. According to Maghyereh & Al-Zoubi (2006) relative stock

performance measure stock performance relative to a market benchmark or an

industry benchmark, while absolute stock performance measures stock

performance without comparison to any other market or portfolio. Strong (2009)

advances that the latter measure does not care if a stock outperformed or

underperformed a market; all that matters is that our stock performed well or not.

Also, investors who are inclined to the latter measure more than the former tend

to dislike risk more than an average investor.

 64

Other concepts related to stock returns are total stock return and total

stock return cash amount. Total stock return includes an appreciation in the price

plus any dividends paid, divided by the original price of the stock.

Trend of Stock Returns of Publicly Listed Real Estate Companies

0.66

0.26 0.21

0.13

0.03
2017 2016 2015 2014 2013
Figure 9
Trend of stock returns of Publicly Listed Real Estate Companies from 2013-
2017

As shown in the figure 2, the stock returns of the top 10 Real Estates in

the Philippines have continuously increased in the first three years but

aggressively decreased in the fourth year and increase again in the fifth year.

Return on stock represents a combination of dividends and increases in the stock

price. Total return determines an investment’s true growth over time. It is

important to evaluate the big picture and not just one return metric when

determining an increase in value. It is used when analyzing a company’s

historical performance. Calculating expected future returns put reasonable

expectation on an investor’s investment and helps plan for retirement or other

needs. (Investopedia, 2018)

 65

However, it is explained herein the reason why despite of the large

amount in capitalization results in a lower stock returns. The small firm effect is a

theory that holds that smaller firms, or those companies with a small market

capitalization, outperform larger companies. The small firm effect market

anomaly is a factor used to explain superior returns in the Three Factor Model,

created by Gene Fama and Kenneth French — the three factors being the

market return, companies with high book-to-market values and small stock

capitalization. Of course, verification of this phenomenon is subject to some time

period bias. The time period examined when looking for instances in which small

cap stocks outperform large caps largely influences whether or not the

researcher will find any instance of the small firm effect. At times, the small firm

effect is used as rationale for the higher fees that are often charged by fund

companies for small cap funds. (Investopedia, 2018)

According to Al (2012) the most important factors that affect the stock

return and the excessive volatility as well as where the investors rely on to take

their investment decisions are balance of payments, number of employees and

the size of the company. Another study, discussed other factors affecting stock

returns. According to Er and Vuran (2012) previous year’s returns, financial

ratios and macroeconomic variables are significantly affecting the stock returns.

Accordingly, an increase in the stock price results to a higher stock

returns. As shown in the graph, an abnormal decreased of stock returns from

year 2015 to 2016 are based on the study of Frisch (2014) wherein it tests for

under reaction and overreaction in the South African stock market by examining
 66

abnormal returns on the stocks following large price rises and drops. The results

of the empirical investigation suggest that large price increases and declines are

likely to be followed by positive market returns.

4. Relationship of Retained Earnings and Stock Returns when profile

intervenes

Unstandardized Standardized
Coefficients Coefficients
Decisi Verb
on al
Inter
pret
Std. atio
Model B Error Beta t Sig. n
1 (Constant) .950 .556 1.708 .163
retention .059 .065 .314 .904 .417 FR NS
years -.027 .013 -.719 -2.017 .114 FR NS
assets -2.054E-9 .000 -1.010 -1.161 .310 FR NS
employees -8.807E-5 .000 -.549 -.843 .447 FR NS
capitalizatio
1.463E-9 .000 1.176 1.002 .373
n FR NS
a. Dependent Variable: stock returns c. d.
b. P-value=.517, f-value=.993

Table 5
Descriptive Statistics on the Relationship of Retained Earnings and Stock
Returns when profile intervenes

4.1 Years of business existence

Table shows that the profile of the business’ years of existence has no

significance when it comes to the effect of retained earnings to the stock returns

of publicly listed real estate companies in the Philippines. It can be seen from the
 67

value of .114 which is less than the p value of .517 which means that the years of

operation of this publicly listed real estate companies do not matter with regard to

retained earnings and stock returns.

Starmalls Inc. has been up for 49 years with different achievements who

conducts all of its operations through its subsidiaries, Masterpiece Asia

Properties, Inc. and Manuela Corporation. The subsidiaries are involved in the

acquisition of undeveloped land, the planning and design of developments, the

securing of regulatory approvals for development and sale or lease, the

supervision of land development and construction and the marketing and

selling/leasing of its products. [ CITATION PSE18 \l 1033 ] On the other hand,

8990 Holdings Inc. and Anchor Land Holdings, Inc. has been up with 14 years

with 25 projects by the latter and 14 projects by the former.

The bloom of real estate business in the Philippines is influenced by the

vast innovation on the modern world. The real estate industry’s steady growth in

the past decades is attributed to the increase in demand for residential and

commercial properties driven by various factors (Ortiguero, 2018). Real estate

services firms can be considered as the most significant turning points and

challenges that have had an impact on the Philippine real estate industry (Remo,

2017).

4.2 Total Assets

Table shows that the profile of the business’ total assets has no significance when it

comes to the effect of retained earnings to the stock returns of publicly listed real estate

companies in the Philippines. It can be seen from the value of .310 which is less than the
 68

p value of .517 which means that the total assets of this publicly listed real estate

companies do not matter with regard to retained earnings and stock returns.

According to [ CITATION Chi18 \l 1033 ] Retained earnings are the portion

of a company's net income that management retains for internal operations

instead of paying it to shareholders in the form of dividends. In short, retained

earnings is the cumulative total of earnings that have yet to be paid to

shareholders. These funds are also held in reserve to reinvest back into the

company through purchases of fixed assets or to pay down debt.

Moreover, Revenue is the total amount of income generated by the sale of

goods or services related to the company's primary operations. Revenue is the

income a company generates before any expenses are taken out. Revenue, or

sometimes referred to as gross sales, affects retained earnings since any

increases in revenue through sales and investments boosts profits or net income.

As a result of higher net income, more money is allocated to retained earnings

after any money spent on debt reduction, business investment, or dividends.

Net income will have a direct impact on retained earnings. As a

result, any factors that affect net income, causing an increase or a

decrease, will also ultimately affect retained earnings.

Although Ayala Land Inc holds the maximum amount of total assets

because they are striving to prioritize hiring within the community, city, or

province where they are located and give opportunities to local businesses and

brands, it does not assure significance of its total assets on the effect of the

stock retention to its retained earnings. Ayala Land currently present in 55

 69

growth centers across the Philippines expanding the role as catalysts and

engines of growth through its large-scale, master planned mixed-use

communities. We continue to contribute to employment in Metro Manila and

provinces in Luzon, and in the past five years we started to grow our

investments in Palawan, Western and Central Visayas, and in the Northern and

Davao regions in Mindanao. [ CITATION Aya18 \l 1033 ] However, Belle

Corporation, since it had recently started has the lowest total assets from its real

estate-related revenues, P1.12 billion was derived from Belle’s lease of the land

and buildings comprising City of Dreams Manila to Melco, with the balance of

P478 million coming from sales of real estate products and property

management activities at its Tagaytay Highlands and Midlands residential and

leisure complexes south of Metro Manila.[ CITATION Bel18 \l 1033 ] .

The large amoount of total assets is from its real assets because of its

nature in the buying and selling of estate properties. According to [ CITATION

Pyh99 \l 1033 ] real estate cycles have been a significant underlying reason for

the financial successes and failures of real estate investments throughout history.

Cycles are a major determinant of success or failure because of their pervasive

and dynamic impacts on real estate returns, risks and investment values over

time—impacts that should not be ignored or over-simplified. Because of this

recognition, as well as a growing industry focus on real estate as a distinct asset

class that deserves increased portfolio allocations, investors and portfolio

managers are placing increased emphasis on the strategic and decision-making

implications of real estate cycle theory and analysis. Moreover, the inflexible,
 70

immobile condition of property makes it highly essential to convert the internal

corporate one-way road of command into two-way-traffic. [ CITATION Gla13 \l

1033 ]

4.3 Number of employees in the business

Table shows that the profile of the number of employees in the business

has no significance when it comes to the effect of retained earnings to the stock

returns of publicly listed real estate companies in the Philippines. It can be seen

from the value of .447 which is less than the p value of .517 which means that

the number of employees in the business of this publicly listed real estate

companies do not matter with regard to retained earnings and stock returns.

Real estate business is more on advertising their products to the public.

Acoording to (Kimmons, 2018) real estate business has three major activities;

house recruiting: real estate agent establishes a contact with the seller of

a real estate property in order to represent him to the potential buyers, visit

that real estate agent shows the real estate property to the potential

buyers; and sale that help the buyer and the seller of the real estate property

making the transaction. From this, employees on real estate business are not of

quantity but the the quality they have as an asset to the company.

Additionally, the differences in the small- and large-business workforces

are, at least in part, a result of the inherent differences in small and large firms.

Small firms are often younger (indeed, they are sometimes recent startups),

more likely to be in rural areas, and more apt to be in industries with lower

economies of scale, such as services. Small firms can represent a life stage
 71

before economies of scale are reached (or hoped-for future growth is attained),

or they can be a stable anchor in the marketplace. These age, location, and

industry effects constitute the basic differences between small and large firms

and can lead to different workforce needs and different resources to attract

workers of various education levels and occupations. (Headd, 2010)

4.4 Capitalization

Present, past and future earnings of the company generally guide the

shareholders‟ expectations of dividends and capital gains. The portion of

earnings into dividends, and retained earnings is taken into account by the

investors. (Khan, 2009) However, there is no significant relationship where

retained earnings and stock returns has an effect when the capitalization of the

company intervenes. Determinants of stock returns usually involves inflation,

dividend policies and other external factors, while retained earnings determinants

firm characteristics such as firm size, assets tangibility, profitability, dividend

payout, leverage, growth opportunities, and business risk and managerial

discretion have been identified by different researchers as the determinants of

retained earnings.

6. Information Educational Communication material

The proposed material is objectively made to spread information and

knowledge in determining the relationship between earnings retentions and stock

returns of the top 10 real estate listed firms in the Philippines.