On the alternative proxies for estimating firm growth in empirical corporate finance literature: Evidence from Indian manufacturing sector

Empirical tests of theoretical propositions necessitate quantitative estimation of qualitative firm level attribute. The challenges of such estimation are nowhere more pronounced than it is the context of estimating firm growth as evinced from the multiplicity of proxies used. However in using or theorizing about the validity of these alternative proxies in their quest to measure a common intangible called ‘firm growth’, the issue of inter-relationship between these variables and the dimensions of growth it is capable of capturing has never been explored. This research paper is an attempt to address this issue. This paper uses a sample of 429 listed manufacturing firms for the period 2004-05 to 2010-11, and employs correlation analysis as well as a panel data model to reach its conclusion. Findings of this research suggest that the alternative financial statements based measures of firm growth are not correlated to an extent that can warrant substitution or interchangeable use. And in certain cases correlations are stronger with time lags than without. Furthermore, it is also observed that financial statements based measures of growth have limited explanatory power when it comes to explaining variations in market-to-book ratio of firms. Findings of this paper coupled with studies on the linkage between macroeconomic and capital market conditions with equity prices, provides indirect evidence that market-to-book ratio factors in the forward looking perspective of growth that the other alternative measures are not capable enough to capture, given their historical nature.