Measuring Growth Opportunities

Posted: 23 Oct 2000

See all articles by Jo Danbolt

Jo Danbolt

University of Edinburgh Business School

Ian R. C. Hirst

Heriot-Watt University

Edward A.E. Jones

Heriot-Watt University, Edinburgh

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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.

JEL Classification: G30, G12

Suggested Citation

Danbolt, Jo and Hirst, Ian R.C. and Jones, Edward A.E., Measuring Growth Opportunities. Available at SSRN:

Jo Danbolt (Contact Author)

University of Edinburgh Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS

Ian R.C. Hirst

Heriot-Watt University ( email )

School of Management Riccarton
Edinburgh EH14 4AS, Scotland
0131 451 3555 (Phone)
0131 451 3008 (Fax)

Edward A.E. Jones

Heriot-Watt University, Edinburgh ( email )

School of Management and Languages
Edinburgh EH14 4AS, Scotland
United Kingdom

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