THE IMPACT OF AGE DIVERSITY OF KEY EXECUTIVES TO FINANCIAL RISK TOLERANCE OF SELECTED PHILIPPINE LISTED CORPORATIONS IN FOOD, BEVERAGE

AND TOBACCO SUBSECTOR FOR THE COMPARATIVE YEARS 2009- 2012

CHAPTER 1: THE PROBLEM: RATIONALE AND BACKGROUND

OBJECTIVES THE IMPACT SUBJECT SAMPLE LOCALE AGE DIVERSITY TO FINANCIAL RISK TOLERANCE KEY EXECUTIVES SELECTED PHILIPPINE LISTED CORPORATIONS IN THE FOOD, BEVERAGE AND TOBACCO SUBSECTOR FOR THE COMPARATIVE YEARS 2009- 2012

INTRODUCTION: TRENDS A corporate business must take a certain level of risk to thrive in the market. It is an integral part of the day to day decision making of the key executives to accept or reject uncertainties in their operations. Through the powers mandated by the board, the top management develops strategy on managing the risk on its capital investment decisions. The role of the key executives is to establish a threshold as to determine which level of risk is acceptable and which one will just result to the demise of the corporation. ISSUES There have been a large number of researches dedicated in determining the relationship between company risk tolerance and certain demographic characteristics of the board members. Such demographic characteristics are gender, age, and educational attainment. Some researches validate that there is a relationship that exist, while some do not. The varieties in conclusions lead to an issue as to whether or not there is a significant relationship in these factors with company risk tolerance. OBJECTIVES To determine the impact of age composition of key executives to risk tolerance of Philippine listed corporations in food and beverage industry for

the comparative year 2008- 2012 CONTRIBUTIONS The researchers believe that this study will aid the board members of a corporation in choosing the key executives. The variety in age composition among key executives will provide a better view of risk tolerance.

INTRODUCTION: A corporate business must take a certain level of risk to thrive in the market. The business environment is more competitive than ever and it is characterized by risk, uncertainty, speed and volatility. The concept of risk in business is inextricably linked to the concept of profitability and flexibility. The result of the company (profit or loss) is influenced by unexpected events that accompany its activity (Ducu, Maracine, 2003). It is an integral part of the day to day decision making of the key executives to accept or reject uncertainties in their operations. Through the powers mandated by the board, the top management develops strategy on managing the risk on its capital investment decisions. The role of the key

executives is to make use of their judgment in decision making that can add to the riskiness of the company. There have been a large number of researches dedicated in determining the relationship between company risk tolerance and certain demographic characteristics of the board members. Such demographic characteristics are gender, age, and educational attainment. Some researches validate that there is a relationship that exist, while some do not. The varieties in conclusions lead to an issue as to whether or not there is a significant relationship in these factors with company risk tolerance. According to Serfling (2013), recent research indicates that Chief Executive Officers (CEO) personal characteristics impact corporate policies. Life experiences influence their attitude toward risk, which affects the way they make decisions. However, there is still insufficient evidence on the impact of age diversity of CEOs to their risk taking behaviour despite the availability of information. A key executive such as the CEO has the duty to decide on the day to day operations of the company. The objective is to determine the impact of age diversity of key executives to the financial risk tolerance of selected Philippine listed corporations in food, beverage and tobacco

industry for the comparative years 2009- 2012. Specifically, this study aims to i) examine selected element of top management diversity in terms of age heterogeneity, ii) investigate the impact of such element in the financial risk tolerance of the company through financial risk measures such as operating leverage, financial leverage, diversification, research and development expenditures and stock return volatility and iii) determine whether age heterogeneity or homogeneity has a significant impact to financial risk tolerance. The researchers believe that this study will aid readers in the corporate form of business in determining the relationship between age diversity among key executives and the financial risk tolerance of the company. The diversity in the age of key executives can provide the company the suitable amount of risk taking behaviour that can result to more profitable operations.

RESEARCH QUESTION: This study is conducted to determine the impact of the age diversity of key executives of selected Philippine listed corporations in the food, beverage and tobacco subsector to financial risk tolerance for the comparative years, 2009-2012. Specifically, this study aims to answer the following questions; 1. a. b. 2. What are the demographic profiles of the respondents in terms of the following: Age Position Is there a correlation that exists between the age diversity and the corporate financial

risk tolerance in the following criteria (risk measurement tools) a. b. c. d. e. 3. Stock return volatility Operating leverage Financial leverage Diversification Research and Development (R & D) expenditures To what extent does heterogeneity or homogeneity of age of the respondents affects

corporate financial risk tolerance?

THEORETICAL FRAMEWORK This study is base on the theory of cost-benefit analysis. Cost-benefit analysis centers on the idea that the costs which corporations spend on their projects must be equal to the benefits that they will receive. This theory helps decision makers in analyzing projects that will enhance their corporations growth potential. Aside from this, cost-benefit analysis has the capacity to measure the opportunity cost they will incur because of choosing a certain project instead of another. In this study, the researchers will use a certain measuring technique to know how the age of key executives affect their decisions in handling the risks that their corporation is facing. Cost-benefit analysis will help the key executives in arriving at a sound decision.

SIGNIFICANCE OF THE STUDY Since individuals are either risk-averse or not, this study is considered beneficial not only to the researchers but also to the public in making business and investment decisions. Moreover, this may help the public assess the firms current value and performance. The researchers deem this study to be significant to the present and future investors as a reference on deciding whether to hold, buy, or sell their shares of stocks. The researchers also believe that this study is of use to the companys creditors as an insight of whether to approve loans applied by the company. Furthermore, the researchers determine that it will be of value to the company itself since it can evaluate the firms value and performance through its degree of riskiness. Most of all, this study would be beneficial to the researchers to gain more knowledge and experience, and make the effective students.

SCOPE AND LIMITATIONS

HYPOTHESIS

H1-There is a significant relationship between the age composition of key executives of selected Philippine publicly listed corporations and financial risk tolerance as measured by the corporations marginal figures in stock return volatility, operating leverage, financial leverage, diversification and R & D expenditures.(operational hypothesis)

H2-There is no significant relationship between the age composition of key executives of selected Philippine publicly listed corporations and financial risk tolerance as measured by the corporations marginal figures in stock return volatility, operating leverage, financial leverage, diversification and R & D expenditures.(null hypothesis)

ASSUMPTIONS 1. The attitude of the corporation towards risk may be affected by the demographic profile of the key executives, specifically age and position 2. Generally, companies take into consideration the riskiness of their decision. 3. There exists diversity in age among key executives of the firm.

DEFINITION OF TERMS Risk is the measure of the adverse effect of a situation. It is the occurrence of uncertainty. Profitability - is the state or condition of yielding a financial profit or gain. Key Executives are the highest ranking executives (e.g. chairman/chairwoman, chief executive officer, managing director, president, executive directors, and executive vicepresidents) responsible for the entire enterprise. Key executive or collectively the top management translates the policy formulated by the board-of-directors into goals, objectives, and strategies, and projects a shared-vision of the future. It makes decisions that affect everyone in the organization, and is held entirely responsible for the success or failure of the enterprise. Capital Investment is the money invested in a business venture with an expectation of income, and recovered through earnings generated by the business over several years. It is

generally understood to be used for capital expenditure rather than for day-to-day operations (working capital) or other expenses. Board of Directors - is the group of individuals who are charged with running the corporation. The duties of the board of directors and officers of the corporation are set by the corporate bylaws but are also set by law, specifically by the laws of the state where the business is incorporated. Financial Risk Tolerance is the capacity to accept or absorb financial risk. Stock return volatility Operating leverage Financial leverage Diversification- is a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. Research and Development (R & D) expenditures Top Management Diversity- is the variety in the composition of the top management team that may be categorized in two ways, namely the directly observable ones (e.g. nationality, age, gender and ethnic background) and the less visible ones (educational, functional and occupational background) DiversityHomogeneity-is an aggregate level of index of interpersonal similarity along one, or several dimensions