Frontiers of Entrepreneurship Research
1996 Edition


PRICING HIGH GROWTH FIRMS:
ARBITRAGE OPPORTUNITIES IN THE INC. 100

Benoit F. Leleux, Babson College
Julian E. Lange, Babson College
Veronique M. Matthys, Woodland Hill Associates


Introduction
Research Hypotheses
Database
Research Methodology
Sample Descriptive Statistics
Analysis of Results
Conclusions
References

 


ABSTRACT

The efficiency of the market in pricing stocks which have historically experienced extremely high growth rates is examined. In order to test market efficiency in these conditions, the returns to simple investment portfolio strategies based on public information are investigated. The portfolios consist of shares in the firms listed in the Inc.100 Ranking of the Fastest Growing Public Companies in America. The analyses conducted here indicate that significant abnormal returns are generated for these strategies in excess of what would normally be required to compensate for the level of risk incurred. Although the tests could potentially be affected by a form of survivorship bias, supplementary analyses indicate that this is unlikely to be the case here. The implications of this initial study are enormous, for both investors and issuers. If indeed markets are not able to properly price high-growth entities, a fact long theorized by growth and new venture specialists, then significant abnormal returns could be earned by simple trading rules. Furthermore, the results presented here also support the possible validity of market timing practices.

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1997 Babson College All Rights Reserved
Last Updated 4/12/97 by Cheryl Ann Lopez & Dennis Valencia

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