How does long-term revenue growth contribute to returns on equities?

Abstract

Understanding business growth is important, because it has a wide range of consequences ranging from matters of everyday businesses to valuation and investing. Prediction of long-term growth is often needed, but simple extrapolation of short-term models would exclude any mechanism driving long-term alterations. This thesis aims at understanding mechanisms of long-term growth and how this growth translates into investor returns. First of all, I find that long-term revenue growth is highly skewed with big winners outperforming the rest substantially. Second, contradictory to what one would expect from digital winner-take-it-all mechanisms, this distribution does not change as a function of time. Third, results suggest that the long-term risk of investing into growing companies operates at the level of attenuating growth. Finally, investing in companies with strong negative revenue growth is associated with abnormal risk-adjusted returns of 11.6% per year.