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

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

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

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

Subject:
Stock markets (Forecasts and trends)
Earnings per share (Forecasts and trends)
Stocks (Prices and rates)
Stocks (Forecasts and trends)
Authors:
Ferrer, Rodiel C.
Mallari, Nemia C.
Pub Date:
03/01/2011
Publication:
Name: Journal of International Business Research Publisher: The DreamCatchers Group, LLC Audience: Academic Format: Magazine/Journal Subject: Business, international Copyright: COPYRIGHT 2011 The DreamCatchers Group, LLC ISSN: 1544-0222
Issue:
Date: March, 2011 Source Volume: 10 Source Issue: S1
Topic:
Event Code: 010 Forecasts, trends, outlooks Computer Subject: Stock market; Market trend/market analysis
Geographic:
Geographic Scope: United States Geographic Code: 1USA United States
Accession Number:
275130687
Full Text:
INTRODUCTION

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

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

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

ERM enables management to effectively deal with uncertainty and associated risk and opportunity, enhancing the capacity to build value. Value is maximized when management sets strategy and objectives to strike an optimal balance between growth and return goals and related risks and efficiently and effectively deploys resources in pursuit of the entities objectives. Every stakeholder's needs must be protected and any unanswered need exposes the company to risk. Risk can be considered as "value killer" as it may put an end to a business firm if not properly addressed. The management must be able to know the existence of this "killer" and when it may probably strike in order to combat or to minimize the harm it may bring to the firm. The ultimate goal of business existence is to maximize the result of its operations thereby enhancing sustainable growth. Objectives as to increase in sales and decrease in cost and expenses are good gauge for business performance. While the focus of strategic management is to tap opportunities, risk management then sees to it that threats to these opportunities are checked. Although risk is inherent in an organization's existence, it can either paralyze a potentially successful growth strategy or, if managed properly, it can set the stage for profitable growth.

In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled in descending order. In practice the process can be very difficult, and balancing between risks with a high probability of occurrence but lower loss versus a risk with high loss but lower probability of occurrence can often be mishandled.

In today's competitive, innovative environment, there is variety of solutions for almost all problems. Consequently, when faced with any of a myriad of risks, businesses are no longer restricted to purchasing insurance. Many approaches for managing those risks can be considered, and insurance may or may not be a part of the optimal solution for a particular firm.

Risk management is the systematic and ongoing process of risk identification, assessment, treatment and monitoring. The process as in any other strategies may have an impact on company's earnings. Performance is an indicator of good governance, both on the company level and in terms of government support. Investments in the Bataan Economic Zone must be enhanced in order to develop its competitive edge in the presence of several economic zones in the Philippines. This study attempted to test the effect of risk exposures on earnings per share.

THEORETICAL FRAMEWORK

This investigation is anchored on the theory of Enterprise Risk Management. Over the years, the theory of typologies or categories of business risk have been developed to classify risk exposures. While all have uses, the most commonly cited construction is based on speculative and pure risks. Other pertinent theories were mentioned relevant to the study. The developments in theories in business risks have had a significant impact on the different management approaches in the 90's. Although no single approach could confirm absolute effectivity, risk management poses a vital role in the field of management.

Basically, the research took off from the work of Woodluck (2001) which states that enterprise risk management involves identifying all risks faced by a company, analyzing and quantifying these risks, and then determining the optimal means of limiting, absorbing, or transferring these risks. This approach to risk management creates a centralized risk management function whose role is to consider the risks faced by the firm as changes occur in the firm's strategies, structures, systems, staffing, management styles, skill sets, and shared values. In essence then, enterprise risk management forces the entire firm to rethink how changes in the organization will affect the company's risk exposure. It allows the company to respond to risks more proactively and lead to fewer surprises. As such, enterprise risk management represents a departure from the so-called silo approach to risk management in which individual departments or disciplines act in their own ways to changes in risk exposures. The primary advantage of enterprise risk management over the silo approach is that it provides the potential to manage risks in their entirety and not on a piecemeal basis. When individual departments are given the responsibility for managing risks, the possibility exists that departments will adopt some common approach to handling some form of risk, without fully considering the range of options available to the firm.

Organizations by nature manage risks and have a variety of existing specialized departments or functions that identify and manage particular risks. However, each risk function varies in capability and how it coordinates with other risk functions. A central goal and challenge of ERM is improving this capability and coordination, while integrating the output to provide unified picture of risk for stakeholders and improving the organization's ability to manage risk effectively.

In the same manner, COSO (2004) defined ERM as a process, affected by an entity's board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objective.

Although similar in the ultimate objective, the Casualty Actuarial Society (CAS 2003) has defined ERM as the discipline by which an organization in any industry assesses, controls, exploits, finances and monitors risks from all sources for the purpose of increasing the organization's short- and long-term value to its stakeholders. Implicit in this definition is the recognition of ERM as a strategic decision support framework for management. It improves decision making at all levels of the organization.

As stated in the accounting dictionary (answers.com), enterprise risk management makes each area manager responsible for documenting and evaluating financial controls in his or her own area. People closest to each business unit manage the data, which improves accuracy and completeness and identifies areas with inadequate control measures so action plans can be initiated to resolve problems. A broad term for risk management system that: tracks the progress of outstanding action plans, describes who is responsible for those actions, and sets the expected time for resolution. ERM protects against fraud with systematic data management that ensures multiple reviews and verification raises the level and precision of reporting to management and puts "localized knowledge" to work. Area managers become empowered to understand the impact of their roles on corporate results.

The work of Williams Jr., Smith and Young (1998) identified sources of business risk as the potential variation in outcomes, either a gain or a loss. Uncertainty creates doubts in man's minds concerning his ability to predict the future. Exposure to risk is a situation created whenever the act gives rise to possible gain or loss that cannot be predicted.

Trieschman and Gustavson (1995) pointed out business risk as speculative and pure risk. Speculative risk exists when there is uncertainty about an event that could produce either a profit or a loss. In pure risk no possibility of gain is presented, only the potential for loss.

The work of Harrington and Niehaus (1999) breaks down speculative risk into commodity price, foreign exchange, interest rate and credit risks. Examples are buying new machinery in the production of goods, acquiring more inventory, investments in bonds and stocks, sales may be made but non collections of accounts may hamper operations, and loans acquired in foreign currencies fluctuate because of changes in exchange rate. Pure risk involves losses due to physical assets, human resources, legal liabilities and work related injuries. If such events occur, the company loses money, but if the event does not happen, the company gains nothing because of the principle of indemnification. Indemnification is used in insurance policy agreements as a compensation for damages or loss up to the extent of the value of the property lost. Although business risk involves both speculative and pure risks, the focus of this study is on pure risk.

Relevant to speculative risk is financial risk which deals with risk exposures particularly credit and market risk (Charles, 2004). Market risks cover commodity, foreign exchange, and interest rate risks. Financial risk management is directly and importantly, the result of the emergence of financial tools for controlling interest rate, price, currency, credit and other financial risks (Young, 2001). Corporations, particularly financial institutions, have long had exposure to such risks, but the rise of exchanges and capital market innovation in the 1970s, 1980s and 1990s have contributed to the expansion of many financial risk management tools such as forwards, futures, options and other types of derivatives. Given the dynamism present in both the investment world and in corporate financial management circles, it shouldn't be too surprising to learn that the financial risk manager presently is in the ascendancy and has some chance of claiming the ultimate title of corporate risk manager. Much of the academic research and higher level practitioner literature today reflects an assumption that all organizational risk management derives from financial risk management.

Operational risks are all business risks which are neither market nor credit risks which are associated with operating a business (Carouhy, 2001). This is divided into two components, operational failure risk and operational strategic risk. Operational failure risk is an internal failure which is encountered in the pursuit of a particular strategy due to people, process and technology while operational strategic risk is an external failure which is the risk of choosing an inappropriate strategy in response to environmental factors such as political, taxation, regulation, government, societal, competition and others.

The classification of the business risk exposures are used to explain the theoretical framework. The components and structure is illustrated in figure 1.

[FIGURE 1 OMITTED]

CONCEPTUAL FRAMEWORK

A well implemented organized risk management programs may lead to a favorable effect on firm's performance. Prior research work has not explored the effect of risk management processes taken as a whole on the firm's performance in terms of earnings per share. This study is one such step taken in that direction.

[FIGURE 2 OMITTED]

STATEMENT OF THE PROBLEM

1. What is the firm's level of risk exposures in terms of speculative risks namely commodity, foreign exchange and interest rate risks and pure risks namely physical assets, human resource, legal liabilities and work related risks?

2. Do the risk exposures in terms of speculative and pure risks exert significant effect on the firms' earnings per share?

SIGNIFICANCE OF THE STUDY

As businesses become more conscious of risks and the means of managing them, recent development necessitates more researches to study risk management in all dimensions. Management researchers continuously recognize the importance of risk management the concepts of which evolve and change dramatically over the years. In this direction, this study, the researchers hope, might prove useful and serve as possible reference materials for managers in the private sector, public sector and non-profit organizations in formulating policies and guidelines.

The insights from this study can also enrich and provide relevant information to the academe and future researchers who may wish to conduct relative studies specifically in the context of risk management.

Related studies which are more focused on pure risks because they have more tangible effects on the enterprises might prove useful to employees because of their susceptibility to some kind of risk exposures and workers injuries. Manufacturers and buyers of goods may be well guided in terms of product liabilities. Insurance agents and brokers might find the study useful as complementary materials with respect to risk coverage.

Investors are always on the lookout about the risk exposures that hamper investments. This paper would somehow give useful information to prospective locators and developers of an economic zone which is the venue of this research. Information may suggest effective plan for program implementation which will strengthen the appropriate risk management approaches that may be used.

Knowledge in recent development in risk management and its continuing evolution is a plus factor. This study will on its way be of help to the researcher because of the opportunity to have an in-depth understanding of the different manufacturing processes of various industries covered by the research.

RESEARCH METHODOLOGY

The research method used, population of the study, instrumentation, data gathering procedures, and statistical treatment of data are embodied in the following discussions.

Research Method

Quantitative research according to Zulueta (2006) is characterized by the use of statistical analysis. The three basic quantitative research objectives are to describe, to compare and to attribute causality. Each of these objectives is done through the assignment of numerical values to variables and the mathematical analysis of those values. In quantitative descriptive research, the researchers' purpose is to answer questions about a variable status by creating numerical descriptions of the frequency with which one of the variables occurs.

A multiple regression analysis was performed to test the if the EPS is affected by the speculative and pure risks. The regression equation is as follows:

CPR = [[beta].sub.0] + [[beta].sub.1][EPSInd.sub.i] + [e.sub.i]

FERR = [C.sub.0] + [C.sub.1] EPSInd.sub.i] + [e.sub.i]

IRR = [D.sub.0] + [D.sub.1][EPSInd.sub.i] + [e.sub.i]

CR = [E.sub.0] + [1.sub.1][EPSInd.sub.i] + [e.sub.i]

PA = [F.sub.0] + [F.sub.0][EPSInd.sub.i] + [e.sub.i]

HRA = [G.sub.0] + [G.sub.0][EPSInd.sub.i] + [e.sub.i]

LL = [H.sub.0] + [H.sub.1][EPSInd.sub.i] + [e.sub.i]

WRI = [I.sub.0] + [I.sub.1][EPSInd.sub.i] + [e.sub.i]

where:

[EPSInd.sub.i] = basic earnings per share of a firm;

CPR = commodity price risk;

FERR = foreign exchange rate risk;

IRR = interest rate risk;

CR = credit risk;

PA = physical assets;

HRA = human resource assets;

LL = legal liabilities;

WRI = work related injuries;

Bs, Cs, Ds, Es, Fs, Gs, Hs and Is = parameters of the model or the estimated marginal effects of individual explanatory variables on the dependent variables;

e 1 = Error term or disturbance term attributable to unknown factors.

The statistical significance of the individual regression coefficients were tested using the Studentized residual or t-test.

t-ratio = regression coefficient/standard error of coefficient

while the overall significance of each regression model was determined by calculating the corresponding coefficient of determination or [R.sup.2] and its corresponding F-ratio, viz:

[R.sup.2] = 1 [summation][e.sup.2]/ [summation][y.sup.2]

where

[summation][e.sup.2] = squared deviations of estimates from actual observation

[summation][y.sup.2] = squared difference of actual data from its mean

And

F-ratio = [R.sup.2]/ n - k / (1 - [R.sup.2])/n-k

where

k = number of explanatory variables n = sample size

If the computed F-ratio exceeds critical values at a specified level of significance, say 5 percent, and degrees of freedom, then the regression model is deemed statistically significantly different from zero. In other words, the explanatory variables, taken collectively, exert a significant effect on the dependent variable of choice. It is also a test of significance of the R2 which in turn measures the "goodness of fit" of the model.

POPULATION OF THE STUDY

A total of 38 companies currently operating at the Bataan Economic Zone were the subject of this study. These companies represent 100% of the total population, all manufacturing firms.

The respondents were the people performing the functions of the risk/general managers, production managers, marketing managers, finance managers and human resource managers of the companies who accomplished the questionnaire. However, there was no clear cut indication as to the specific position each one has accomplished as the questionnaire was taken as a whole. One person may be performing one, two or even all the functions. He may be the highest executive of the firm who is the focal point of decision making.

INSTRUMENTATION

This study made use of the primary and secondary sources of data. The primary sources were researchers-made questionnaire, interviews and observation.

The questionnaire was formulated and designed to obtain data pertinent to the sub problems covered by this study. This instrument was validated by conducting a dry run among parties who were not involved in this study. They were the faculty members of the engineering department BEZ Campus. Items left unanswered during the dry-run of the questionnaire were revised and simplified for reason of being unclear. The instrument was finally subjected to face and content validity by the researcher's adviser and evaluators after which the final form of the questionnaire were made ready for use to the subjects of this study.

With the aim of enriching, reinforcing and strengthening the findings and to gather further information, personal unstructured interviews were also used to get comprehensive picture of the corporate culture and the practices of the companies. In addition, observation through personal inspection of the premises was done to complement the survey questionnaire and interviews.

The researchers also relied on the following secondary sources of data: a) Library services - vital information on literature reviews were gathered from various libraries, b) Internet services, c) Data from Securities and Exchange Commission for Financial Statements, d) Pertinent Republic Acts for the study, e) Fire Department Records for previous fire experiences at the Zone, f) Safety Department Records for health safety and work related injuries of the employees, g) Police Blotter for any reported incidence of theft and pilferages and problems encountered by the locators with respect to the zigzag road hazards, h) Bank managers for export and import experiences of the enterprises and their collections and payments activities, i) Industrial doctors and nurses for the day to day health and accident problems of the employees, j) Social Security System to verify if the contributions for SSS premiums are updated, k) Municipal Office for any concern regarding risks exposures of the enterprises, m) Department of Labor and Employment, and n) "Assessment of Risk" similar to marketing intelligence done by the researchers from jeepneys and bus stops for any information that may be gathered direct from the employees uttered informal statements.

DATA GATHERING PROCEDURE

The researchers started by visiting the Administration Office of BEZ Industrial Promotions Division Chief in order to know exactly the manufacturing company locators presently operating at the Bataan Economic Zone. There were thirty eight manufacturing companies still actively operating. To collect meaningful and accurate data relevant to the study, a survey questionnaire was designed to enable the researchers gather all the necessary information regarding risk management of the companies. These were sent to the risk/general managers, production managers, marketing managers, finance managers and human resource managers of the companies who accomplished the questionnaire. Each of the respondents answered the portion of the questionnaire which are applicable to his line of expertise and they came up with one set of accomplished instrument.

PRESENTATION, ANALYSIS, AND INTERPRETATION OF DATA

Speculative Risk

Speculative risk is a risk in which either a gain or loss may occur. This kind of risk covers output and input commodity price, output and input foreign exchange risk and output and input interest rate risk and credit risk.

Data from Table 1 suggest that output commodity price risk covering decrease in sales and other income due to competition (weighted mean: 3.58) due to late delivery (weighted mean: 2.45) due to export quota (weighted mean: 1.82) due to cancelled / recalled orders (weighted mean: 2.27). Input commodity price risk covering increase in cost and expenses due to increase in cost of raw materials and supplies (weighted mean: 4.18) due to increase in manpower and salaries and wages (weighted mean: 4.16) due to unattained production quota (weighted mean: 3.08) due to increase in power rate and power consumption (weighted mean: 3.58) due to spoilage and shrinkage (weighted mean: 2.43)

Competition pauses difficult factor to overcome because of emerging of more cheap products which are manufactured from other Asian countries such as China, Vietnam, Korea, Macau and India. Market forces are difficult to counteract because of cheap labor & other manufacturing expenses in other countries which tend to make selling price much lower as compared to Philippines made products. The rest to which the companies are exposed to are controllable such as late delivery which may bring about cancelled or recalled order and product quality. Export quota is rarely imposed on products being manufactured in BEZ.

Input commodity price risk increases cost of production and other expenses. With a mean of 4.18, 4.16 and 3.58, the companies are exposed in increase in cost of raw materials & supplies, increase in manpower & salaries and wages and increase in power rate and power consumption. That means cost of product produced tend to become expensive. High cost of production with no corresponding increase in selling price tends to reduce profit. Unattained production quota has a mean of 3.08 which makes the company moderately exposed. Again, the tendency of the product produced if the required quantity to be produced is not reached, then cost of the product will be high because the fixed cost will not be fully utilized. Spoilage & shrinkage has a mean value of 2.43 which makes the company rarely exposed to. In some production process, shrinkage & evaporation cannot be avoided and therefore the cost of remaining products absorbs the total cost. As a result, the cost of the product then increases.

The average mean is 2.98 which corresponds to moderate exposure to output and input commodity price risk.

It is observed in table 2 that the mean of 3.87 tends to expose the companies in decrease in sales and other income due to decrease in exchange rate. Lesser pesos per dollar would mean lesser total sales in terms of pesos and lesser amount to pay labor cost & expenses which is denominated in terms of pesos. Whereas decrease in sales & other income due to increase in foreign exchange has a mean of 3.58 which also makes the companies exposed to foreign exchange risk. This means that more pesos are required to purchase the same quantity of materials & supplies.

Table 3 revealed that the mean is 2.53 which is rarely exposed because of decrease in interest rate. Some companies have loan exposures to related parties for quite a period of time which are non interest bearing. There are opportunity costs on these loan exposures which mean that an income may have been generated with other ventures using the amount. While some companies have advances from related parties, other companies on the other hand have loans acquired which are interest bearing. This places them in a risk exposure of 3.0 which is moderately exposed.

The average of the mean which is 2.79 places the companies in a moderate exposure to interest rate risk.

Table 4 projected measure of credit risk exposures. Production for exports is normally made thru telegraphic transfer which eases up collections. Still a few transactions are covered by letters of credit. That is why a mean of 2.37 or rarely exposed is derived from the survey. For the payment of liability, some companies are indebted to related parties such as parent company, another subsidiary company or even from stockholders. More often than not, these kinds of loan are none interest bearing and may be good to a considerable period of time. Other loans obtained by some companies are export advances which are readily paid upon collections of exported products. Collection of receivables on exported sales does not pause much problem because these are usually made by telegraphic transfer which is fast and easy. Sometimes, about 20% of export transactions use letters of credit. Never a transaction happened with an open account. Risk exposures on payment of liabilities are put at a mean of 2.58 which is moderately exposed.

An average mean of 2.47 places the companies in a rarely exposed position when it comes to credit risk.

Pure Risk

Pure risk exposure is a risk in which a gain is not possible, only a loss. This covers risk exposures of physical assets, human resources, legal liabilities and work related injuries.

It can be gleaned from table 5 that pure risk exposures involving physical assets are characterized as follows: On building improvements and betterments/ machineries and equipments: Fire (weighted mean: 2.95) electrical disturbances (weighted mean: 2.95) installation and construction hazard (weighted means: 2.37) breakdown (weighted mean: 2.73) obsolescence (weighted mean: 2.35). On inventories: fire (weighted mean: 2.66) spoilage (weighted mean: 2.24) inventory shortage due to shrinkage/evaporation (weighted mean: 2.11) pilferage (weighted mean: 2.55) obsolescence (weighted mean: 2.25) On vehicles: accident (weighted means: 2.43) breakdown (weighted mean: 2.41) operations of vehicle (weighted mean: 2.46) loss of integral part of set, pair or group (weighted mean: 2.14). On valuable files: fire (weighted mean: 2.39) losses resulting from records destruction (weighted mean: 2.68) technology risks (weighted mean: 2.50) Locational: zigzag road hazards (weighted mean: 2.76) water supply shortage/ inaccessibility to firefighters (weighted mean: 2.18) concentration of physical assets in one area (weighted mean: 2.18).

Table 5 shows physical assets risk exposures of building, improvements, mechanics and equipment, inventories, vehicles, valuable files and locational factors.

Risk exposures of building, improvements, machineries and equipment consisting of fire and electrical disturbances are the highest risk exposures because although the standard factory buildings are made from concrete materials, they have been constructed for more than 30 years already. On the other hand,, being on an economic zone, the buildings and machineries are periodically checked by the safety department. Machine breakdown is possible as this may be used at its maximum capacity with a work schedule of 6-2, 2-10 and 10-6. As long as the machines are being used in current operations, obsolescence is a minimal source of risk exposure.

Fire is the normal highest source of risk exposure in inventories. Spoilage may be brought about by handling or exposure to light and humidity. For B grade products, these are saleable locally during the trade fair being held during year end. Inventory shortage due to shrinkage results to scrap materials recovery but normal losses due to shrinkage and evaporation are observed. Pilferage may be the result of laxed security guards or even collusion among employees. Fast turnover of materials and reasonable economic order quantity enables the company to keep obsolescence of inventory to the minimum. Interview with fire and industrial safety division reinforces the response of the company which is business interruption brought about by fire and other catastrophe. In terms of pilferage police blotters show a low incident of reported cases reinforces the findings which is rarely exposed.

The foreigners are very particular about accidents and maintenance of their vehicles because of the legal liabilities that go along with this risk exposure. Good garage minimizes loss of integral parts and repair parts.

Valuable files usually are kept in fireproof vaults for safekeeping. Back up files are maintained for computer-based records to minimize losses resulting from records destruction, antivirus mechanism may be installed, and safety sequences may be used to file important records. These measures may be used by the companies having risk exposures from rarely to moderately exposed.

Locational factors affect the company in one way or another. Some companies with heavy loads get stuck up in the zigzag road leading to delays in going to and from the zone affecting other road users. Zigzag road hazard is minimized by imposing a fine of P500 by per hour by the local ordinance for every vehicle that will encounter a problem and will block the passage. BEZ is located in a condition where there is good water supply and very accessible to firefighters.

The building structure minimizes the concentration of physical assets in one area. The average of the mean of 2.48, rarely exposed, indicates that the companies' exposures to pure risk involving physical assets are kept at the minimum.

In table 6, the credit risk exposures are characterized as follows: Illness (weighted mean: 2.71) retirement (weighted mean: 2.18) disability (weighted mean: 2.26) death (weighted mean: 2.08).

Employees of the company are sources of strength although at times they are also sources of risk which tends to increase cost and losses thereby reducing value for the stockholders. Human assets exposures are possible pure risk resulting from death, poor health, retirement or unemployment of an organization's employees. With the presence of company doctors and nurses, a regular check up may be made on the employees for possible illness and weak resistance to diseases. There are some companies which carry retirement plans and employee benefits as reflected in the financial statements. However, most companies hire new breed of workers on a contractual basis, who are easily replenishable and not subject to regularization. Companies are rarely exposed to disability and death because of the insurance with Social Security System and group insurance which are carried by some companies. Hiring of skilled workers ensures a smooth sailing flow of production with less interruption.

Table 7 depicts that credit risk exposures are characterized as follows: Product liabilities (weighted mean: 2.58) liability arising from negligence (weighted mean: 2.54) contract liabilities (weighted mean: 2.35) failure on environmental control (weighted mean: 2.32) work related injuries of employees (weighted mean: 2.58) non compliance with statutory requirements (weighted mean: 2.03).

Warranties on products produced have a mean of 2.58, moderately exposed. Some companies have buyer's representative to look into its quality control for a stringent screening of the products. A recent issue on product liability shook the world with the discovery of Melamine in milk which was produced in China. Negligence accounts for 2.54, also moderately exposed. Product mishandling may bring about unfavorable results. Contracts entered into by Zone Enterprises are complied with at BEZ, environmental control is very strict and regulatory bodies are very active in implementing policies and guidelines. Work related injuries of employees resulted to a mean of 2.58 moderately exposed. Since only regular employees are covered by the mandatory SSS coverage and Employees Compensation, injuries sustained by contractual employees are shouldered by their respective companies without the aid of SSS or Phil health, non compliance with statutory requirements resulted to a mean of 2.03 rarely exposed. Being a BEZ registrant, there are several rules and regulations that a locator must comply with and that in order to avoid revocation of their registration, companies comply with statutory requirements. SSS office and Philhealth office at BEZ are very strict in premiums collections. Frequent visits are made to the offices which are not updated in the remittances of premiums. In case of health failure or accidents, the employees are assured of SSS and Philhealth benefits. Municipal office of Mariveles sees to it that compliance with the required documentations are observed before a business permit is given. SSS clearance, BIR, sanitary permit, engineering and fire safety certifications to name some of these requirements.

As a whole legal liabilities risk exposure average of the mean is 2.38, rarely exposed, probably because their existence is co-terminus with the compliance with what is legal.

Table 8 shows that credit risk exposures are characterized as follows: Falls on slippery or greasy floor (weighted mean: 2.18) accident from machine operations (weighted mean: 2.55) fumes from chemicals (weighted mean: 2.18) sparks/ harmful rays, heat (weighted mean: 2.13) unsafe protective approaches (weighted mean: 2.03) poor lighting due to missing lamps (weighted mean: 2.00) dirty fixtures (weighted mean: 2.05) poor ventilation (weighted mean: 2.16) extreme noise exposures (weighted mean: 2.21) exposure to computers (weighted mean: 2.45).

Table 8 summarizes the risk involving work-related injuries. Risk prevention and risk reduction are the mitigating means of the companies to counteract accidents and poor working condition. Constant checking and regular cleaning time of janitors decreases the probability of falls on slippery or greasy floor and dirty fixtures. Proper disposal and safekeeping of chemicals and wearing appropriate apparel makes employees avoid fumes from chemicals and unsafe protective approaches as well as sparks/harmful rays and heat. Work conditions such as poor lighting is minimized by immediate replacement of missing lamps. Buildings are so designed to ensure good source of ventilation of fresh air. Extreme noise happens only in cases where repairs are ongoing. However, in cases where the normal operations involve extreme noise, workers are limited to shorter number of hours of exposure. In a highly mechanized business, use of computers is a must and exposure to it cannot be avoided. Industrial safety division report incidents on health and work related injuries which are in consonance with the result of the survey which is rarely exposed. Information from industrial doctors and nurses indicates only minor occurrences of injuries maybe because of the following reasons: (a) workers are considered skilled and are careful enough to be injured by the equipment and (b) modern machineries and equipments have guards and gadgets so as to minimize accidents. The average mean is 2.19 which is rarely exposed.

An important component of the study is to test the if risk exposures such as speculative and pure risks exert significant effect on firms' earnings per share. As presented in table 9, all the variables showed no significant effect on earnings per share. However, at 5%, level of significance, commodity price risk, credit risk and work related injuries almost showed significant effect at .063%, .065%, and .055% respectively. The foreign exchange and monitoring techniques at .148% and .165% also present a higher than .05 level of significance. Further, no significant effect on earnings per share are shown by physical assets risks at .277 legal liabilities at .288, human resource at .398, risk treatments at .354 and risk management policies and guidelines at .504. The interest rate risk is the least significant with p-value of .854. Findings suggest that risk exposures such as speculative and pure risks do not have significant effect on firms' earnings per share.

CONCLUSION

Based on the findings presented, the researchers came up with the following conclusions: At 5% level of significance, pure risk such as work related injuries; speculative risks such as commodity price and credit risks presented an almost significant impact on earnings per share at p-value of .055, .063 and .065 respectively. However, for foreign exchange rate risk, physical assets, human resources and interest rate have varying degrees of insignificance with earnings per share. The impact to earnings per share is complemented by sufficiency of existing risk management policies and guidelines, the level of implementation of risk treatments and their monitoring practices. Therefore, risk exposures standing alone may not be a sufficient gauge to measure the impact on earnings per share because of the underlying factors.

The use of Earnings per share as exogeneous variable, based on the statistical evidence from regression analysis, failed to establish significant relationship and causal link between EPS and speculative and pure risks, of 38 manufacturing companies in Bataan Economic Zone in the Philippines. Or, it could be that risk exposures such as speculative and pure risks do not exert significant effect on firms' earnings per share.

RECOMMENDATIONS

In view of the findings of this study, the researchers made the following recommendations and hope that they would contribute to the attainment of the goal.

Levels of risk exposures must always be checked because this cannot be totally eliminated: One of the companies out of 38 is hedging as a way of mitigating loss from foreign exchange. May the companies do not stop to find ways and means to mitigate risk that may add to their staying power. That the increase in foreign exchange may not bring about an accompanying increase in interest rate in order not to disrupt strategies and budget plans earlier established. To those companies which are pioneer exporters, reciprocal accounts of receivables and payables may be sustained at some point in time. The regulators must always see to it that reports made by the companies are properly and correctly stated. This ensures organized system of reporting. Since risk exposures has no significant relationship on earnings per share, the installation of a qualified risk manager is necessary who would take charge of the full implementation of the whole risk management process.

The success of Bataan Economic Zone in promoting business and attracting foreign investors depends on the factors that lower cost and ensure better investment climate. By scanning the internal and external environment, analysis of strength, weaknesses, opportunities and threats in the zone must be considered.

The SWOT analysis must be well addressed and reviewed. Timely actions must be done in order to maximize utilization of the Bataan Economic Zone which has been waiting for a big leap for quite some time now. 1) Harmony between PEZA and the provincial government must be enhanced in order to attract more investors. 2) A strong and sensitive approach of regulatory framework must be adapted. 3) Full implementation of what is embodied in the IRR of RA 7916 otherwise known as Special Economic Act of 1995 as amended by RA 8748.

Other studies using the same venue may further be made on the following issues: social responsibility of the zone enterprises which enhances community development and social acceptance Human Rights issues because the fact that there are no strikes does not mean no human rights are violated. Transfer pricing issues for taxes lost.

REFERENCES

Charles, Tapiero (2004). Risk and Financial Management: Mathematical and Computational Methods. John Wiley & Son. Retrieved on September 5, 2008 from http://en.wikipedia.org/wiki/Financial_risk_management

Crouchy, Mickel, Galai, Dan & Mark, Robert. (2001). Risk Management. New York:McGraw-Hill Enterprise Risk Management Integrated Framework - Executive Summary. (2004). Retrieved on October 6, 2008 from http://www.coso.org

Harrington, Scott E., & Niehaus, Gregory R. (1999). Risk Management and Insurance. New York: McGraw-Hill. Overview of Enterprise Risk Management- Casualty Actuarial Society. (2003). Retrieved on September 16, 2008 from http://www.casact.org/research/erm/overview.pdf

Pete Woodluck and Ray Ross. (2001). Managing Risk at the Enterprise Level. Retrieved on May 2008 from http://www.entrepreneur.com/tradejournals/article/84652723.html

Trieschmann, James S., & Gustavson, Sandra G. (1995). Risk Management & Insurance. 9th Edition. Ohio: South-Western College Publishing.

Williams Jr., C. Arthur, Smith, Michael L., & Young, Peter C. (1998). Risk Management and Insurance. 8th Edition. New York: McGraw-Hill.

Young, Peter and Tippins, Steven. (2001). Managing Business Risk: An Organization-Wide Approach to Risk Management. AMACOM:American Management Association.

Zulueta, Francisco M., & Costales, Nestor Edilberto B. (2006). Methods of Research Thesis-Writing and Applied Statistics. Reprinted Edition. Mandaluyong City: National Book Store.

Rodiel C Ferrer, De La Salle, Manila, Philippines

Nemia C. Mallari, Polytechnic University of the Philippines
Table 1: Weighted Mean and Verbal Interpretation of Output and Input
Commodity Price Risk

Output Commodity Price Risk:
Decrease in Sales & Other
Income                           Weighted Mean   Verbal Interpretation

Due to Competition                   3.58               Exposed

Due to late delivery                 2.45           Rarely Exposed

Due to export quota                  1.82           Rarely Exposed

Due to cancelled / recalled
orders                               2.37           Rarely Exposed

Due to product quality               2.27           Rarely Exposed

  Input Commodity Price Risk:
Increase in Cost & Expenses      Weighted Mean   Verbal Interpretation

Due to increase in cost of raw
materials & supplies                 4.18               Exposed

Due to increase in manpower &
salaries & wages                     4.16               Exposed

Due to unattained production
quota                                3.08         Moderately Exposed

Due to increase in power rate
& power consumption                  3.58               Exposed

Due to spoilage & shrinkage          2.43           Rarely Exposed

Grand Weighted Mean                  2.98         Moderately Exposed

Table 2: Weighted Mean and Verbal Interpretation of Speculative Risk
Covering Foreign Exchange Rate Risk
                                           Weighted        Verbal
                                             Mean      Interpretation

Output Exchange Rate Risk : Decrease in      3.87          Exposed
Sales & Other Income due to decrease in
Exchange rate

Input Exchange Rate Risk: Decrease in        3.58          Exposed
Sales & Other Income due to increase in
Exchange rate

Grand Weighted Mean                          3.72          Exposed

Table 3: Weighted Mean and Verbal Interpretation of
Speculative Risk Covering Interest Rate Risk

                                      Weighted          Verbal
                                        Mean        Interpretation

Output Interest Rate Risk: Decrease
  in Sales & Other Income due to
  decrease in interest rate             2.53        Rarely Exposed

Input Exchange Rate Risk: Decrease
  in Sales & Other Income due to
  decrease in interest rate             3.00      Moderately Exposed

Grand Weighted Mean                     2.79      Moderately Exposed

Table 4: Weighted Mean and Verbal Interpretation of
Credit Risk Exposures

                                      Weighted          Verbal
                                        Mean        Interpretation

Risk of Non Collection of Accounts      2.37        Rarely Exposed

Risk of Non Payment of Liabilities      2.58      Moderately Exposed

Grand Weighted Mean                     2.47        Rarely Exposed

Table 5: Weighted Mean and Verbal Interpretation of Pure Risk
Involving Physical Assets

Building Improvement and Betterments/    Weighted   Verbal
Machineries/Equipments                   Mean       Interpretation

  Fire                                   2.95       Moderately Exposed
  Electrical Disturbances                2.95       Moderately Exposed
  Installation and Construction Hazard   2.37       Rarely Exposed
  Breakdown                              2.73       Moderately Exposed
  Obsolescence                           2.35       Rarely Exposed

              Inventories                Weighted   Verbal
                                         Mean       Interpretation

  Fire                                   2.66       Moderately Exposed
  Spoilage                               2.24       Rarely Exposed
  Inventory shortage due to shrinkage
    / evaporation                        2.11       Rarely Exposed
  Pilferage                              2.55       Rarely Exposed
  Obsolescence                           2.25       Rarely Exposed

                Vehicles                 Weighted   Verbal
                                         Mean       Interpretation

  Accident                               2.43       Rarely Exposed
  Breakdown                              2.41       Rarely Exposed
  Operations of vehicle                  2.46       Rarely Exposed
  Loss of integral part of set,
    pair or group                        2.14       Rarely Exposed

             Valuable Files              Weighted   Verbal
                                         Mean       Interpretation

  Fire                                   2.39       Rarely Exposed
  Losses resulting from records
    destruction                          2.68       Moderately Exposed

  Technology risks                       2.50       Rarely Exposed

               Locational                Weighted   Verbal
                                         Mean       Interpretation

  Zigzag road hazards                    2.76       Moderately Exposed

    Water supply shortage/
      Inaccessibility to firefighters    2.18       Rarely Exposed

  Concentration of physical assets
    in one area                          2.18       Rarely Exposed

Grand Weighted Mean                      2.48       Rarely Exposed

Table 6: Weighted Mean and Verbal Interpretation of Pure Risk
Involving Human Resource Assets

                       Weighted Mean    Verbal Interpretation

Illness                     2.71          Moderately Exposed

Retirement                  2.18            Rarely Exposed

Disability                  2.26            Rarely Exposed

Death                       2.08            Rarely Exposed

Grand Weighted Mean         2.31            Rarely Exposed

Table 7: Weighted Mean and Verbal Interpretation of Pure
Risks Involving Legal Liabilities

Legal Liabilities                     Weighted          Verbal
                                        Mean        Interpretation

Product Liabilities                     2.58      Moderately Exposed

Liability arising from negligence       2.54      Moderately Exposed

Contract Liabilities                    2.35        Rarely Exposed

Failure on environmental control        2.32        Rarely Exposed

Work related injuries of employees      2.58      Moderately Exposed

Non compliance with statutory
  requirements                          2.03        Rarely Exposed

Grand Weighted Mean                     2.38        Rarely Exposed

Table 8: Weighted Mean and Verbal Interpretation of Pure
Risks Involving Work Related Injuries

Accidents                            Weighted          Verbal
                                       Mean        Interpretation

Falls on slippery or greasy floor      2.18        Rarely Exposed

Accident from machine operations       2.55      Moderately Exposed

Fumes from chemicals                   2.18        Rarely Exposed

Sparks / harmful rays, heat            2.13        Rarely Exposed

Unsafe protective approaches           2.03        Rarely Exposed

Work Condition                       Weighted          Verbal
                                       Mean        Interpretation

Poor lighting due to missing lamps     2.00        Rarely Exposed

Dirty fixtures                         2.05        Rarely Exposed

Poor ventilation                       2.16        Rarely Exposed

Extreme noise exposures                2.21        Rarely Exposed

Exposure to computers                  2.45        Rarely Exposed

Grand Weighted Mean                    2.19        Rarely Exposed

Table 9: Regression of EPS on Speculative and Pure Risks

Earnings per share     Coefficients     t-      p-        Remarks
                                     computed  value

(Constant)              -5401.562     -.339    .741   Not Significant

Speculative Risks       19404.338     2.635    .063   Not Significant
  Covering Commodity
  Price Risks

Speculative Risks       -5124.782     -1.555   .148   Not Significant
  Covering Foreign
  Exchange Rate Risks

Speculative Risks        -561.066     -.188    .854   Not Significant
  Covering Interest
  Rate Risks

Speculative Risks       -3983.540     -2.052   .065   Not Significant
  Covering Credit
  Risk

Pure Risks Involving    -5108.146     -1.144   .277   Not Significant
  Physical Assets

Pure Risks Covering     -4671.718     -.880    .398   Not Significant
  Human Resource
  Assets

Pure Risks Covering     -5353.280     -1.117   .288   Not Significant
  Legal Liabilities

Pure Risks Covering     12799.656     2.151    .055   Not Significant
  Work Related
  Injuries
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