The ability of the market to price high growth stocks is examined by analyzing the returns to simple investment portfolio strategies based on public information. The portfolios consist of shares in the firms listed in the Inc. 100 Ranking of the fastest growing public companies in America. The results indicate that significant abnormal returns are generated by these strategies, even after adjusting for risk. 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. These results support the assumption that markets have difficulties pricing high-growth entities, leaving significant arbitrage opportunities in these stocks and validating the use of various market timing practices.
Arbitrage, High Growth Firms, Inc 100, Valuation
Leleux, Benoit F.; Matthys, Veronique M.; and Lange, Julian E.
"Pricing High Growth Firms: Arbitrage Opportunities in the Inc. 100,"
Journal of Entrepreneurial and Small Business Finance:
1, pp. 43-60.
Available at: http://digitalcommons.pepperdine.edu/jef/vol5/iss1/4