Benoit F. Leleux, Babson
College
Julian E. Lange, Babson College
Veronique M. Matthys, Woodland Hill Associates
Introduction
Research
Hypotheses
Database
Research
Methodology
Sample Descriptive Statistics
Analysis
of Results
Conclusions
References
The efficiency of the market in pricing stocks which have historically experienced extremely high growth rates is examined. In order to test market efficiency in these conditions, the returns to simple investment portfolio strategies based on public information are investigated. The portfolios consist of shares in the firms listed in the Inc.100 Ranking of the Fastest Growing Public Companies in America. The analyses conducted here indicate that significant abnormal returns are generated for these strategies in excess of what would normally be required to compensate for the level of risk incurred. 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. The implications of this initial study are enormous, for both investors and issuers. If indeed markets are not able to properly price high-growth entities, a fact long theorized by growth and new venture specialists, then significant abnormal returns could be earned by simple trading rules. Furthermore, the results presented here also support the possible validity of market timing practices.
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Last Updated 4/12/97 by Cheryl Ann Lopez & Dennis Valencia
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