Growth Opportunities and Technology Shocks

Abstract

We propose a theoretically motivated procedure for measuring heterogeneity in firms’ growth opportunities and document its empirical properties. The term “growth opportunities” refers to the component of a firm’s market value that cannot be attributed to its assets in place. This decomposition of firm value underpins many of the theoretical models describing cross-sectional differences in firms’ investment and stock return behavior. However, successful applications of such models depend on the quality of empirical measures of growth opportunities. Our procedure identifies economically significant differences in firms’ growth opportunities which are not captured by the commonly used empirical measures.