Does the SME Exchange Properly Function as a “Growth Market”? A Look Through its Correlation with Private-Firm Growth

Abstract

This paper evaluates whether a stock exchange targeted specifically at SMEs, namely, the SME exchange, functions as a “growth market” by capitalizing industry growth opportunities into stock prices. To this end, we examine the correlation between the SME exchange prices—aggregated up to the industry level—and private-firm growth. That is, we use the growth of private firms in an industry as a proxy for industry growth options that the SME exchange prices need to embody. Using data from Korea whose SME exchange is one of the largest in the world, we find that the SME exchange prices are positively correlated with the growth of private firms, especially when they are small in size, they belong to a growing industry, or their growth is funded by equity. In the same regression, the main board stock prices are correlated with the liability-funded growth of large-size private firms in a mature industry. Taken together, our results suggest that the SME exchange plays a positive and complementary role in the economy by embodying the type of industry growth opportunities that are not readily represented by the main board stock prices.