Company growth and growth opportunities on the example of some EU stock exchanges in the light of market characteristics
DOI:
https://doi.org/10.18778/0208-6018.359.04Keywords:
company growth, growth opportunities, stock marketsAbstract
This paper analyzes the relationship between growth opportunity measures and the future growth of companies. If there is a correlation between a company’s growth potential and its real growth, then the markets are more predictable and effective. The survey was conducted on the example of the following European markets: Austria, the Baltic Countries, Hungary, France, Poland, and Germany. The goal of this paper is to assess the relationship between growth opportunity measures and the future growth of companies listed on the stock exchanges of some markets in the European Union. The countries considered can be classified according to the size of the state, market liquidity, and the maturity of the exchange. Those external factors were expected to influence the strength of the growth and its opportunity relationship. It was found that growth opportunity measures based on market prices have predicting power for the future growth of companies. They are also strongly related to companies’ future growth in large countries and weakly related to future growth in small countries. This paper adds to the literature on the application of growth opportunity measures regarding market characteristics. These results are in line with the view that market liquidity should increase its efficiency in revealing the value of stocks and the Comprehensive Advantage of Large Countries hypothesis.
Downloads
References
Bali T.G., Peng L., Shen Y., Tang Y. (2014), Liquidity Shocks and Stock Market Reactions, “The Review of Financial Studies”, vol. 27(5), pp. 1434–1485.
Google Scholar
DOI: https://doi.org/10.1093/rfs/hht074
Biddle G.C., Ma M.L., Song F.M. (2022), Accounting conservatism and bankruptcy risk, “Journal of Accounting, Auditing & Finance”, vol. 37(2), pp. 295–323.
Google Scholar
DOI: https://doi.org/10.1177/0148558X20934244
Bolek M., Pietraszewski P., Wolski R. (2021). Companies’ growth vs. growth opportunity: Evidence from the regular and alternative stock markets in Poland, “Acta Oeconomica”, vol. 71(2), pp. 279–307.
Google Scholar
DOI: https://doi.org/10.1556/032.2021.00014
Brealey R.A., Myers S.C. (1981), Principles of Corporate Finance, McGraw-Hill, New York.
Google Scholar
Chen K. (2002), The influence of capital structure on company value with different growth opportunities, “SSRN Electronic Journal”, 313960.
Google Scholar
DOI: https://doi.org/10.2139/ssrn.313960
Chordia T., Roll R., Subrahmanyam A. (2006), Liquidity and Market Efficiency, “Journal of Financial Economics”, vol. 87(2), pp. 249–268.
Google Scholar
DOI: https://doi.org/10.1016/j.jfineco.2007.03.005
Cooper M.J., Gulen H., Schill M.J. (2008), Asset growth and the cross-section of stock returns, “Journal of Finance”, vol. 63(4), pp. 1609–1651.
Google Scholar
DOI: https://doi.org/10.1111/j.1540-6261.2008.01370.x
Danbolt J., Hirst I .R., Jones E. (2011), The growth companies puzzle: can growth opportunities measures predict firm growth?, “The European Journal of Finance”, vol. 17(1), pp. 1–25.
Google Scholar
DOI: https://doi.org/10.1080/13518470903448432
Delmar F. (2006), Measuring growth: methodological considerations and empirical results, “Entrepreneurship and the Growth of Firms”, vol. 1(1), pp. 62–84.
Google Scholar
Demirgüç Kunt A., Levine R. (1996), Stock markets, corporate finance, and economic growth: an overview, “The World Bank Economic Review”, vol. 10(2), pp. 223–239.
Google Scholar
DOI: https://doi.org/10.1093/wber/10.2.223
Dimson E. (1979), Risk measurement when shares are subject to infrequent trading, “Journal of Financial Economics”, vol. 7(2), pp. 197–226.
Google Scholar
DOI: https://doi.org/10.1016/0304-405X(79)90013-8
Erhardt E.C. (2021), Measuring the persistence of high firm growth: choices and consequences, “Small Business Economics”, vol. 56(1), pp. 451–478.
Google Scholar
DOI: https://doi.org/10.1007/s11187-019-00229-7
Fama E.F., French K.R. (2007), The anatomy of value and growth stock returns, “Financial Analysts Journal”, vol. 63(6), pp. 44–54.
Google Scholar
DOI: https://doi.org/10.2469/faj.v63.n6.4926
Greenwood J., Jovanovi B. (1990), Financial development, growth, and the distribution of income, “Journal of Political Economy”, vol. 98(5, Part 1), pp. 1076–1107.
Google Scholar
DOI: https://doi.org/10.1086/261720
Hashai N., Zahra S. (2022), Founder team prior work experience: An asset or a liability for startup growth?, “Strategic Entrepreneurship Journal”, vol. 16(1), pp. 155–184.
Google Scholar
DOI: https://doi.org/10.1002/sej.1406
Hodgson A., Okunev J. (2021), Long term equity risk premiums in the UK and US: A cautionary tale of weak mean reversion, “The European Journal of Finance”, pp. 1–17.
Google Scholar
DOI: https://doi.org/10.1080/1351847X.2021.2007150
Hull M., McGroarty F. (2014), Do emerging markets become more efficient as they develop? Long memory persistence in equity indices, “Emerging Markets Review”, no. 18, pp. 45–61.
Google Scholar
DOI: https://doi.org/10.1016/j.ememar.2013.11.001
Hunt A., Moyer S., Shevlin T. (2000), Earnings volatility, earnings management, and equity value, unpublished working paper, University of Washington, Washington.
Google Scholar
Kallapur S., Trombley M.A. (1999), The Association between Investment Opportunity Set Proxies and Realized Growth, “Journal of Business Finance and Accounting”, vol. 26(3–4), pp. 505–519.
Google Scholar
DOI: https://doi.org/10.1111/1468-5957.00265
Kester W.C. (1984), Today’s Options for Tomorrow’s Growth, “Harvard Business Review”, vol. 62(2), pp. 153–160.
Google Scholar
King R.G., Levine R. (1993), Finance, entrepreneurship, and growth, “Journal of Monetary economics”, vol. 32(3), pp. 513–542.
Google Scholar
DOI: https://doi.org/10.1016/0304-3932(93)90028-E
Kuznets P.W. (1985), Government and economic strategy in contemporary South Korea, “Pacific Affairs”, vol. 58(1), pp. 44–67.
Google Scholar
DOI: https://doi.org/10.2307/2758009
Milner C., Westaway T. (1993), Country size and the medium-term growth process: some cross-country evidence, “World Development”, vol. 21(2), pp. 203–211.
Google Scholar
DOI: https://doi.org/10.1016/0305-750X(93)90015-2
Mohd Daud S.N., Ahmad A.H., Ngah W.A.S.W. (2021), Financialization, digital technology and income inequality, “Applied Economics Letters”, vol. 28(16), pp. 1339–1343.
Google Scholar
DOI: https://doi.org/10.1080/13504851.2020.1808165
North D.C. (1991), Institutions, “Journal of Economic Perspectives”, vol. 5(1), pp. 97–112.
Google Scholar
DOI: https://doi.org/10.1257/jep.5.1.97
Ottoo R.E. (1998), Valuation of internal growth opportunities: The case of a biotechnology company, “The Quarterly Review of Economics and Finance”, vol. 38(3), pp. 615–633.
Google Scholar
DOI: https://doi.org/10.1016/S1062-9769(99)80093-3
Ottoo R.E. (2020), Valuation of corporate growth opportunities: a real options approach, Routledge, New York–London.
Google Scholar
DOI: https://doi.org/10.4324/9780203055977
Ouyang Y. (2016), Concept: Comprehensive Advantages of Large Countries (CAOLC), [in:] The Development of BRIC and the Large Country Advantage, Springer, Singapore, pp. 31–56.
Google Scholar
DOI: https://doi.org/10.1007/978-981-10-0633-3_3
Pham S.D., Nguyen T.T.T., Do H.X. (2022), Effect of futures trading on the liquidity of underlying stocks: Evidence from Vietnam, “Pacific-Basin Finance Journal”, vol. 73, 101772.
Google Scholar
DOI: https://doi.org/10.1016/j.pacfin.2022.101772
Rudiyanto A., Paramita P.D., Suprijanto A. (2018), Effect of Growth Opportunity, Capital Structure, Management Ownership, Corporate Social Responsibility, to the Value of the Company with Profitability as a Moderating Variable, “Journal of Accounting”, vol. 4(4), pp. 1–14.
Google Scholar
Ryu D., Yu J. (2022), Sentiment‐dependent impact of funding liquidity shocks on futures market liquidity, “Journal of Futures Markets”, vol. 42(1), pp. 61–76.
Google Scholar
DOI: https://doi.org/10.1002/fut.22274
Stock market capitalization, in dollars – Country rankings (n.d.), https://www.theglobaleconomy.com/rankings/stock_market_capitalization_dollars/ (accessed: 20.05.2021).
Google Scholar
Tobin J. (1969), A General Equilibrium Approach to Monetary Theory, “Journal of Money, Credit, and Banking”, vol. 1(1), pp. 15–29.
Google Scholar
DOI: https://doi.org/10.2307/1991374
Weinzimmer L.G., Nystrom P.C., Freeman S.J. (1998), Measuring organizational growth: Issues, consequences, and guidelines, “Journal of Management”, vol. 24(2), pp. 235–262.
Google Scholar
DOI: https://doi.org/10.1177/014920639802400205
Youhao T. (1999), On Big Country’s Economy also on Chinese Economic Development Strategy, “Reform of Economic System”, no. 3, pp. 127–148 .
Google Scholar
Zhang K.H. (2007), International production networks and export performance in developing countries: Evidence from China, “Chinese Economy”, vol. 40(6), pp. 83–96.
Google Scholar
DOI: https://doi.org/10.2753/CES1097-1475400605