Last year, the Philippines, along with Brunei, Cambodia, Indonesia,

Laos, Malaysia, Myanmar, Singapore, Thailand, and Vietnam, ratified the

ASEAN economic integration; reducing costs of trading and increasing
investment opportunities for the member states. Firms in these countries
are exposed to potential profit opportunities due to the easing of trade
regulations in neighboring countries; but this begs the question, to what
end do firms invest and how do they make the right decisions in
investing?
Firm management engage in various projects, such as normal
business operations, intangible assets, and investments and other firms in
order to provide returns as a way of compensating the prior investments
of stockholders in their companies. Stockholders invest in firms in
anticipation of future returns from their present investments in the
company. But how do managers know what investments cater the best for
both the firm and the stockholders?
Some investments, such as research and development, enhance the
capability and efficiency of the company in conducting normal business
operations; while other investments, such as investments in trading
securities or business expansions, provide firms additional cash flows that
could be used for dividends or further investment. One thing is certain in
both types of investments, firms invest in these projects in order to
increase earnings potential and positive returns. These returns, though,
are experienced in varying time horizons depending on the type of
investments; with concrete investments, such as expansions, experiencing
returns quicker than intangible investments, such as research and
development. Managers decide on which investment to pursue based on
the firms investment management structure, or the various factors such
as costs, risk appetite, investment horizons, management style, and other
intangible constraints imposed by top management.
In deciding which investments to pursue, managers consider factors
imposed by the investment management structure of the company and
most importantly, historical and projected returns from potential
investments. Management is inclined to exercise a certain degree of
caution or prudence in managing the company as future investments in
the firm by stockholders and their own variable compensation is
dependent on the financial performance of the firm. This degree of
prudence, or conservatism, assist management in pursuing seemingly
riskier, but truly efficient, investment decisions by providing easier access
to funding from both debt and equity.