Measuring growth opportunities

Danbolt, J., Hirst, I. and Jones, E. (2002) Measuring growth opportunities. Applied Financial Economics, 12(3), pp. 203-212. (doi: 10.1080/09603100110090064)

Abstract

Although the impact of growth opportunities on company value has been recognized since Miller and Modigliani (1961), relatively little empirical work has been undertaken to value growth opportunities. In this study the validity of the KBM model (Kester (1984) and Brealey and Myers (1981)) is tested on a sample of 278 large UK companies for 1987-1995. Applying standard assumptions, the value of growth opportunities is found 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.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Hirst, Prof Ian and Jones, Dr Edward and Danbolt, Prof Jo
• Authors: Danbolt, J., Hirst, I., and Jones, E.
• Subjects: H Social Sciences > HB Economic Theory
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Applied Financial Economics
• Publisher: Routledge
• ISSN: 0960-3107
• Copyright Holders: Copyright © 2002 Routledge
• First Published: First published in Applied Financial Economics 12(3):203-212
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher