What Explains Cross-Country Difference in Corporate Valuations? Growth Opportunities or Profitability?

46 Pages Posted: 12 Aug 2021 Last revised: 4 Oct 2021

See all articles by Dong Wook Lee

Dong Wook Lee

Korea University

Lingxia Sun

Nankai University - Business School; Sun Yat-sen University (SYSU) - ISBF; Korea University Business School (KUBS)

Date Written: September 26, 2021


We distinguish the valuation effects of growth opportunities and profits through a common lens, namely, corporate free cashflows (FCF) whose negative value means investments using external funds while positive value means internal funds available for payouts. The sign of FCF’s cross-sectional relation to firm value in a country (FCF beta) can show which one has a greater impact on country-wide corporate valuations. Using data from 43 countries for the period of 1992-2018, we show that firm values are higher in countries whose FCF beta is more negative—i.e., where externally funded corporate investments, not internally available corporate profits, are valued higher. The role of growth opportunities in country-wide valuations is more pronounced among growth firms. In contrast, mature firms are representative of the valuation of the global industry to which they belong, not their country. Finally, the FCF beta is more negative in common law countries than in civil law countries, suggesting that growth-supporting governance is more value-relevant than payout-securing governance at least at the country level.

Keywords: Country-wide valuation; Growth opportunities; Free cashflow; Functional efficiency

JEL Classification: F30; F65; G30

Suggested Citation

Lee, Dong Wook and Sun, Lingxia and Sun, Lingxia, What Explains Cross-Country Difference in Corporate Valuations? Growth Opportunities or Profitability? (September 26, 2021). Available at SSRN: https://ssrn.com/abstract=3902731 or http://dx.doi.org/10.2139/ssrn.3902731

Dong Wook Lee (Contact Author)

Korea University ( email )

523 Hyundai Motor Hall
Korea University Business School
Seoul, 02841
Korea, Republic of (South Korea)
+82.2.3290.2820 (Phone)
+82.2.3290.1307 (Fax)

Lingxia Sun

Nankai University - Business School ( email )

94 Weijin Road, Nankai District
Tianjin, 300071

Sun Yat-sen University (SYSU) - ISBF ( email )

Tangjiawan, Zhuhai Campus
Zhuhai, Guangdong 519082

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701

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