Measuring growth opportunities

Abstract

Although the impact of growth opportunities on company value has been recognised since Miller and Modigliani (1961), relatively little empirical work has been undertaken to value growth opportunities. In this paper we test the validity of the KBM model (Kester (1984) and Brealey and Myers (1981)) on a sample of 278 large UK companies for 1987-1995. Applying standard assumptions, we find the value of growth opportunities to account for a larger proportion of market values than assets-in-place.However, tests of the KBM model cast doubt on the credibility of these results and the validity of the model. The KBM model is highly sensitive to the inclusion of inflation in the risk free interest rate, and with a real interest rate (which on theoretical grounds is preferable), the model ceases to provide credible results. The model also fails to provide results consistent with expectations derived from option pricing theory regarding the relationship between the value of growth opportunities and the value of assets-in-place. These limitations of the KBM model indicate a need for a reappraisal of the method of measuring the value of growth opportunities. Measuring Growth Opportunities ABSTRACTAlthough the impact of growth opportunities on company value has been recognised

Can growth opportunities explain the diversification discount?

“…Empirical evidence suggests that the value of growth opportunities accounts for a large proportion of total firm value. For example, Kester (1984) and Danbolt et al (2002) both find that the present value of growth opportunities on average accounts for more than 50% of company market values.…”

An Empirical Analysis of Growth Options of Japanese Electronics Firms

“…Previous empirical studies conducted in US and UK have claimed about statistical significance of growth options possessed by firms (Danbolt et al 2002;Kester 1984;Tong and Reuer 2006). Using a sample of 128 US biotechnology companies, Chi and Levitas (2007) examined Tobin's Q as a proxy for the value of growth opportunities and found that the effects of firm's technology patents on the firm's Tobin's Q are enhanced with increasing uncertainty.…”

Efeito dos investimentos sobre fundamentos de valor da empresa: uma análise de empresas brasileiras pré-operacionais e operacionais

“…A semelhança das oportunidades de crescimento com as opções financeiras é explorada por diversos autores. Myers e Turnbull (1977) Embora a distinção entre o valor dos ativos instalados e dos ativos de crescimento seja conceito relevante para a avaliação do patrimônio dos acionistas (MILLER e MODIGLIANI, 1961), da estrutura de capital (MYERS, 1977), do custo de capital e das decisões de investimento de capital (CHUNG e KIM, 1997;MYERS e TURNBULL, 1977;MAJD e PINDYCK, 1985), há dificuldade prática de separar esses dois elementos, conforme observado na literatura (HIRST et al, 2008;ANDRÉS-ALONSO et al, 2006;DANBOLT et al, 2002;CHUNG e KIM, 1997;BREALEY e MYERS, 1992).…”