• The Korean Journal of Financial Management
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• v.24 no.2
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• pp.1-40
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• 2007

We test a model of investment-cashflow-growth opportunities relationship in order to estimate the sensitivities to investments. In this study, we use a new proxy variable for the value of growth opportunities(hereafter "VGO"), which is based on the seminal papers of M&M(1958:1961:1963) and Lee(2006;2007). The empirical findings on the sensitivities of cashflow and growth opportunities are as follows. First, when the traditional proxy variables for the growth opportunities such as Tobin's Q, MBR and sales growth are included with the new proxy VGO in the estimation, their coefficients are turned out to be insignificant. Second, only the new proxy variable VGO shows a statistically significant positive sensitibity to investment, which can be regarded that the growth opportunities hold the positive influences to investments. Third, the Tobin's Q can be decomposed into three factors such as the value of growth opportunities(VGO), the value of asset-in-place and valuation errors. It turns out that only the VGO shows a statistically significant positive relationship with investment among others. This means that the new variable VGO is a good proxy variable for the growth opportunities in the investment-cashflow sensitivity analysis. In sum, thanks to the above findings in this study, we can say that it will not be proper to choose a proxy variable for the growth opportunities from the traditional set of proxies such as Tobin's Q, MBR, or sales growth rate.

• The Korean Journal of Financial Management
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• v.24 no.1
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• pp.29-58
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• 2007

We develop a model to estimate the value of growth opportunities, which is based on the seminal papers of M&M(1961, 1963) and Lee(2006). Making use of the estimation model, we estimate a new proxy variable of the growth opportunities, other than the usual proxy variables such as quasi Tobin's Q, MBR, and so on. The new proxy variable of growth opportunities can represent a necessary condition to identify whether the increase in new investments are successful or not. The empirical findings on the growth opportunities during the IMF currency crisis period and the post-IMF period are as follows; First, the overall success rate of new investments is as low as 50%, that means only half of the listed firms were increasing new investments when they had the growth opportunities. Second, during the crisis, one third of the listed firms were experiencing negative growth opportunities. However, during the post-IMF period, the growth opportunities on new investments were turned to be positive due to the turnaround efforts of listed firms. Third, the value of intangible assets, which are resulting from the investment of R&D and human capital, are becoming more important than ever. It seems to be true that larger portions of the value of growth opportunities are coming from the intangible assets, not from the increases in new investments of the physical assets.