Explaining the Growth Potential of a Market Leader and Challenger: Evidence from Japan’s Telecommunications Services Industry

Abstract

This study examines the growth potential of the market leader and market challenger in Japan’s telecommunications services industry. We focus on Nippon Telegraph and Telephone Corporation (NTT) and KDDI, the market leader and challenger (respectively) in terms of sales revenue, total assets, and market share. Following finance literatures, we use higher values of price–earnings ratio (P/E) and market-to-book-value-of-equity ratio (MV/BV) as the indicators of growth potential. High growth firms have the potential to outperform the overall market over a significant period of time providing a good investment opportunity for retail and institutional investors. This study uses financial data of the NTT and KDDI from the period between 2001 and 2016 and applies several regression models to examine the growth potential of the market leader and market challenger in Japan’s telecommunications services industry. Using the P/E and MV/BV as indicators of growth potential, we show that the market challenger’s growth potential is significantly higher than that of the market leader, even after controlling for firm size, liquidity, profitability, leverage, cash flow, and age.