Evidence on the extent of relationships among investment opportunity set proxies

Abstract

A number of recent empirical studies have examined the extent to which growth indicators (or ‘proxies’) affect the market reaction to major corporate announcements. Although the method employed in these studies is broadly similar, the results to date have varied quite markedly. One key difference amongst the previous studies relates to the nature of the proxy measures used; although each one is intended to measure a firm's investment opportunity set, more than 100 different variables have now been examined and this proliferation may represent part of the explanation for the inconsistency in overall conclusions. The present paper provides some preliminary evidence about the extent of any correlation among growth measures using UK data for 83 of the most commonly employed variables. The study reports that the various measures are generally correlated with each other in a manner which suggests that they provide a coherent signal about firms' growth prospects, and that inconsistency in the measures used may not provide the underlying reason for heterogeneity in the earlier findings.