AUN BE Conference Slides

Microeconomic Factors Impacting Profitability
of listed Industrial and Services Firms in the

Philippines: An Analysis
Jan Marie Claire J. Edra Dr. Ahmed N.Y. Meandahawi

De La Salle University, Philippines
April 16, 2021
Edra & Meandahawi (DLSU) 2021 AUN-BE Conference April 16, 2021 1 / 31
Problem Rationale
Outline of Presentation
1 Problem Rationale
2 The Framework of the Study
3 The Research Method
4 Results and Discussion
5 Findings, Conclusion, and Recommendations
Problem Rationale
Firm Profitability
Profitable companies are sources of sustainable economic growth

as they provide job opportunities, foster innovation, and pay
taxes.
Profitability of a company describes the ability of the

organization to generate revenue over a certain period.
Return on equity (ROE) is a profitability ratio which reflects the

company’s capability to increase profits without adding new
equity into the business.
Problem Rationale
Philippines’ Industrial and Services Sectors
Regarding investments and competitiveness, the Philippines’

economic performance is falling behind its neighbors.
Industrial and services sectors are amongst the Philippine

economy’s most vital sectors.
Empowering the industrial and services sectors to contribute

significantly to Philippines’ economic progress involves
addressing several constraints, including how firms belonging in
these sectors can increase their profitability.
Problem Rationale
Statement of the Problem
This study aims to investigate the impact of microeconomic factors

on the return on equity (ROE) of 57 industrial and services firms
listed in the Philippine Stock Exchange years 2008-2019.
Firm-specific factors
• Capital structure
Measure of Profitability
• Liquidity
• ROE of industrial and
• Sales growth
services companies
• Firm size
• Firm age
Problem Rationale
Statement of the Problem
The research intends to answer the following question:
Does capital structure, liquidity, sales growth, firm size, and firm
age significantly affect the profitability of listed industrial and
services firms in the Philippines?
Problem Rationale
Research Objectives
The objectives of the study are:
To identify the determinants that significantly affect ROE of

firms
To determine which of the factors positively or negatively affect

ROE of firms
To contribute to the literature regarding the impact of

microeconomic factors on profitability of Philippine industrial
and services companies
Problem Rationale
Hypotheses
H1 : Capital structure significantly affects the ROE of listed industrial
and services firms in the Philippines.
H2 : Liquidity significantly affects the ROE of listed industrial and

services firms in the Philippines.
H3 : Sales growth significantly affects the ROE of listed industrial and

H4 : Firm age significantly affects the ROE of listed industrial and

H5 : Firm size significantly affects the ROE of listed industrial and

Problem Rationale
Significance of the Study
Contributes to the existing body of knowledge by identifying

the impact of certain microeconomic factors on the profitability
of Philippine companies
Serves as reference for future researchers regarding the factors

affecting firm profitability
Provides guidelines to firms on suitable business strategies

that managers must consider to attain their company’s
profitability goals and help them overcome the challenges
brought by the current pandemic crisis
Problem Rationale
Scope and Limitations
(1) The analysis of this research is mainly focused on the impact of

microeconomic factors to the profitability of industrial and
services companies listed in the PSE.
(2) The study covered five selected microeconomic variables namely,

capital structure, liquidity, sales growth, firm size, and firm age.
(3) The data utilized is secondary data which is within the time
frame of 2008 - 2019.
(4) The study failed to include 2020 data as 2020 annual financial
statements of most firms are not yet available in databases.
The Framework of the Study
1 Problem Rationale
Theoretical Framework
Firm-specific factors Supporting theories

Capital Structure MM Theory, Trade-off theory,
Pecking-order theory
Liquidity Trade-off theory, Pecking-order theory
Sales Growth Theory of firm growth
Firm size Economies of scale
Firm age Theory of learning by doing, Theory of
structural inertia
Conceptual Framework
The Research Method
1 Problem Rationale
The Research Method
Research Design
Secondary data was used in this study in which the financial

statements and company profile of industrial and services companies
listed in the PSE were used for the computation of financial ratios,
growth, firm size, and firm age.
The data was obtained from Reuters and PSE Electronic

Disclosure Generation Technology (PSE Edge) database.
Panel regression analysis was done to determine the

microeconomic factors which have significant impact on the ROE of
sampled Philippine industrial and services companies.
Gretl software was used in conducting the statistical tests.
The Research Method
Research Design
Variables Description
Net Income
ROE
Shareholder’s Equity
Total Debt
Capital Structure
Total Shareholder’s Equity
Current Assets
Current Ratio
Current Liabilities
Net sales for the current period - Net sales for the prior period
Sales Growth Net sales for the prior period
Firm size Natural logarithm of total assets

Firm age Current year − Year of incorporation
The Research Method
Sampling Method
The sampling method used is purposive sampling, such that the

specific criteria applied consist of:
(a) Industrial and services firms listed in the PSE for the years
2008-2019
(b) Industrial and services firms that published complete financial

statements for the years 2008-2019
The Research Method
Sampling Method
The final sample comprises 57 firms, 25 of which are industrial

firms and 32 are services firms.
With 11 years of time period after computing sales growth and

57 unbalanced cross-sectional units after computing the natural
logarithm of ROE, the total number of observations is 503.
Results and Discussion
1 Problem Rationale
Regression Model
The study employed the following model:
LROEi ,t = αi + β1 CSi ,t + β2 CURRENTi ,t + β3 GROWTHi ,t
+ β4 SIZEi ,t + β5 AGEi ,t + i ,t
where
• LROE is the natural logarithm of ROE;
• CS is capital structure;
• CURRENT is current ratio;
• GROWTH is sales growth;
• SIZE is firm size;
• AGE is firm age;
• is the error term;
• α is unobserved time-invariant individual effect;
• i is the company selected and t is time series.
Descriptive Statistics
Most firms:
registered a loss based on average ROE;
have high dependence on external financing availability;
are highly liquid;
are relatively old in the industry;
are medium-sized.
Panel Model Diagnostics

Test for Multicollinearity
For multiple regression to be applicable, the relationship between

the independent variables should not be substantial i.e., VIF
values must be less than 10.

Breusch-Pagan Test
The Breusch-Pagan test was done to determine whether it is

appropriate to employ a pooled OLS model or a random-effects
model.
The Lagrange Multiplier (LM) value shows that a pooled OLS

model is not adequate to explain the data, χ2 (1, N = 503) =
270.631, p < .05.

Hausman Test
A Hausman test has been conducted to know the applicability of

using a random-effects model or a fixed-effects model.
The Hausman value shows that a fixed effects model is suitable

for the regression analysis, χ2 (5, N = 503) = 25.3678, p < .05.
Regression Results
Findings, Conclusion, and Recommendations
1 Problem Rationale
Findings
A panel regression analysis was done to determine the impact of

microeconomic factors on firms’ ROE, wherein a fixed effects
model has been applied.
While capital structure, liquidity, and firm age have a

significant negative impact, sales growth has a significant
positive impact on firm performance. Firm size, on the other
hand, failed to predict ROE significantly.
Conclusion
It is concluded that capital structure, liquidity, sales growth, and

firm age are the microeconomic factors significantly impacting
profitability of listed industrial and services firms in the
Philippines.
Recommendations
Due to the significant impact of these factors to profitability, it is

essential that the listed industrial and services firms in the Philippines:
(1) maintain an appropriate capital structure

(2) increase revenue streams
(3) establish an efficient liquidity management system
(4) enhance innovation
Recommendations
Following are the suggestions for future research:
When the latest pandemic crisis’ data is available, a comparative

analysis between pre-pandemic period and pandemic period may
be conducted.
A more comprehensive set of explanatory variables (combination

of macroeconomic and microeconomic factors) may be
considered.
Jan Marie Claire J. Edra (jan marie edra@dlsu.edu.ph)
Dr. Ahmed N.Y. Meandahawi (ahmed.meandahawi@dlsu.edu.ph)
Financial Management Department, De La Salle University
Thank you!

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Microeconomic Factors Impacting Profitability

of listed Industrial and Services Firms in the

Jan Marie Claire J. Edra Dr. Ahmed N.Y. Meandahawi

April 16, 2021

2 The Framework of the Study

3 The Research Method

4 Results and Discussion

5 Findings, Conclusion, and Recommendations

Profitable companies are sources of sustainable economic growth

Profitability of a company describes the ability of the

Return on equity (ROE) is a profitability ratio which reflects the

Philippines’ Industrial and Services Sectors

Regarding investments and competitiveness, the Philippines’

Industrial and services sectors are amongst the Philippine

Empowering the industrial and services sectors to contribute

Statement of the Problem

This study aims to investigate the impact of microeconomic factors

Statement of the Problem

The research intends to answer the following question:

The objectives of the study are:

To identify the determinants that significantly affect ROE of

To determine which of the factors positively or negatively affect

To contribute to the literature regarding the impact of

H2 : Liquidity significantly affects the ROE of listed industrial and

H3 : Sales growth significantly affects the ROE of listed industrial and

H4 : Firm age significantly affects the ROE of listed industrial and

H5 : Firm size significantly affects the ROE of listed industrial and

Significance of the Study

Contributes to the existing body of knowledge by identifying

Serves as reference for future researchers regarding the factors

Provides guidelines to firms on suitable business strategies

Scope and Limitations

(1) The analysis of this research is mainly focused on the impact of

(2) The study covered five selected microeconomic variables namely,

2 The Framework of the Study

3 The Research Method

4 Results and Discussion

5 Findings, Conclusion, and Recommendations

Firm-specific factors Supporting theories

2 The Framework of the Study

3 The Research Method

4 Results and Discussion

5 Findings, Conclusion, and Recommendations

Secondary data was used in this study in which the financial

The data was obtained from Reuters and PSE Electronic

Panel regression analysis was done to determine the

Gretl software was used in conducting the statistical tests.

Firm size Natural logarithm of total assets

The sampling method used is purposive sampling, such that the

(b) Industrial and services firms that published complete financial

The final sample comprises 57 firms, 25 of which are industrial

With 11 years of time period after computing sales growth and

2 The Framework of the Study

3 The Research Method

4 Results and Discussion

5 Findings, Conclusion, and Recommendations

Panel Model Diagnostics

For multiple regression to be applicable, the relationship between

Panel Model Diagnostics

The Breusch-Pagan test was done to determine whether it is

The Lagrange Multiplier (LM) value shows that a pooled OLS

Panel Model Diagnostics

A Hausman test has been conducted to know the applicability of