Corporate growth and profitability

Abstract

This paper argues that current period corporate growth rates reflect changes in current expectations about the long run profitability of a firm. This means that growth rates are likely to vary randomly over time. Using data from 271 large, quoted UK firms over the period 1976-1982, we report the existence of a positive, statistically significant and robust correlation between current period growth rates and a natural measure of changes in current expectations about long run profitability, namely changes in the stock market valuation of the firm. Nevertheless, we find that variations in corporate growth rates are difficult to predict.