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.

Keywords

Market leader market challenger growth potential telecommunications industry

Introduction

Studying firms’ growth potential is an important part of empirical finance research. Investors use growth potential as an indicator of firms’ prospects (Day et al., 2009). In a competitive market where every company is trying to expand market share, growth potential provides an edge over competitors. Market leaders hold the greatest market share, but this is challenging to retain. All competitors try to capture market share away from rivals. Competition is particularly severe between market leaders and challengers because of their market positions. The terms “market leader” and “market challenger” are generally used to describe the companies holding the largest and second-largest market shares, respectively. Since price is an uncontrollable factor in a competitive marketplace, competitors tend to focus on product differentiation, innovation, and other radical strategies. The features of challengers cannot be naively mixed with those of general followers. Challengers, despite having less market share, can challenge leaders’ position in the market. The success of a challenger depends on how successfully they confront the market leader’s strategy. The strategies of challengers are generally riskier than those of leaders, as challengers need to be more radical (Sheremata, 2004). Most studies of market leaders and challengers focus on market share and other marketing strategies. The financing and operating activities of market leaders and followers are hardly discussed, even though financing decisions are increasingly being used as a value-generating tool, along with investment decision. It is important to investigate how market leaders and challengers make their financing and investment decisions. Challengers are assumed to make financing and investing decisions that are more aggressive than those of market leaders.

Growth potential indicates the expected future growth of companies driven by investment; it is measured based on parameters such as sales, earnings, cash flows, asset, employment, physical output, and value of the stock (Ardishvili, 1998; Basu, 1977; Chan et al., 1991; Chan & Lakonishok, 2004; Delmar, 1997; Fama & French, 1992; Lakonishok et al., 1994). Since growth is a multidimensional phenomenon, previous studies used different measures of firm’s growth (Delmar et al., 2003). While the measurement of firm growth based on the growth of revenue, sales, earnings, and others are common in the literature, P/E and MV/BV ratios are also used as market-based measures of firm growth. We use P/E and MV/BV ratios as the indicators of a firm’s growth potential in this study because they are measured from the market price. Stickeney et al. (2007) explained that market price-based measures provide information about the aggregate expectation of market participants’ on the growth of firms. P/E and MV/BV ratios have also been used extensively in the finance literature to indicate firm growth as an investment strategy. Studies on the growth investment strategy allow investors to design their portfolio in a way that produces superior return than the market. The seminal works of Fama and French (1992) and Lakonishok et al. (1994) provided empirical evidence on the performance of the growth firms. Growth firms are considered to be expanding over the next few years because of the investors’ and analysts’ positive outlook regarding their business prospects over their competitors. Moreover, previous studies have identified that measurement of growth potential on the basis of sales, revenue or profits has limitation to use for all firms and is sensitive to inflation and currency exchange rates (Davidsson & Wiklund, 2000; Delmar et al., 2003).

Growth potential depends on many factors, which are often complex and intertwined. Growth potential can be studied from two different viewpoints. One way is to associate growth potential with a firm’s size, age, cash, leverage, assets, and other firm-specific factors (Bentzen et al., 2012; Bigsten & Gebreeyesus, 2007; Connolly & Hirschey, 2005; Mukhopadhyay & Khalkhali, 2010). The other way is to associate growth potential with a firm’s strategy, organization, and other managerial capabilities. This article seeks to explain the growth potential of the market leader and challenger using the first approach. There are many definitions of “growth potential.” While the general idea is simple, quantifying it is often complex and can produce different implications depending on how it is measured. Growth potential can be measured using ratios such as the MV/BV, P/E, P/CF, and dividend yield. This study uses price–earnings ratio (P/E) and market-to-book-value-of-equity ratio (MV/BV). The MV/BV is a comparison between the book value of equity and investors’ valuation of the future prospects of the company, and the P/E is a comparison between a firm’s earnings per share and investors’ perceptions of the stock valuation. In both cases, higher values indicate that investors’ valuation of the stocks is higher than are their fundamental values.

We choose Japan’s telecommunications services industry because it is one of Japan’s largest industries, with services covering the entire country. Studying the growth potential of a market leader and challenger requires finding the two companies with the largest and second-largest market shares in the industry. Nippon Telegraph and Telephone Corporation (NTT) is the largest telecommunication company in Japan. It began in 1985 and now has a total operating revenue of 10507.4 billion yen. KDDI Corporation (KDDI) is the second-largest telecommunication company in Japan. It began in 1984 and now has an operating revenue of 3572.098 billion yen. NTT is the global market leader in the telecommunication sector in terms of sales revenue, and KDDI is NTT’s closest competitor in the Japanese market (however, NTT’s size and market share are far greater than those of KDDI). In a competitive market, both the market leader and challenger need to follow appropriate growth strategies and make the investments required to retain their market share. The task of the challenger is more difficult because they are concerned about losing market shares to the leader. As a result, market challengers tend to use aggressive strategies and invest more to get closer to the market leader. There are examples of challengers becoming market leaders by using such aggressive and radical strategies. However, the sources of challengers’ success are not uniform but diverse; they include financing, investing, working capital, and distribution. Toyota outperformed General Motors to become the market leader in the international automobile industry (Parker, 2018). Canon also went from a challenger position to become the leader in the copier industry. These are examples of investors perceiving higher growth in market challengers (Canon Watch, 2014). Studies on the success story of Toyota and Canon reveal that a large-scale diversification of operations, investment management, liquidity management, inventory management, working capital management, and others played an important role on achieving leadership in the market (Lee, 2016; Parker, 2018).

This article examines the growth potential of the two dominant telecommunications services firms in Japan—NTT and KDDI. We hypothesize that the growth potential of the market challenger is higher than that of the market leader. The rationale behind our hypothesis is that market challengers use strategies that are more aggressive than the market leaders’, which enhances their growth potential. To test the hypothesis, we used regression equations in which the P/E and MV/BV ratios were employed as dependent variables and a market leader dummy was used as an independent variable, along with several variables to control for firm size, profitability, liquidity, leverage, cash flow, and age. The reason for selecting the market leader and the market challenger of the telecommunications services industry lies in the growth potential of the industry at home and abroad (OG Analysis, 2019). This study contributes to the literature in at least two ways. First, to the best of our knowledge, this is the first study to examine the growth potential of market leaders and challengers in the Japanese market. Second, this study examines firms’ financing and operating activities to explain growth potential, whereas most studies have focused on the marketing strategies of market leaders and challengers (Ferrier et al., 1999; Tse et al., 2006).

The remainder of this article is organized as follows. The section “Review of Literature” provides a literature review. The section “Data and Methodology” describes the data and methodology used. The section “Empirical Findings” describes the main empirical findings, and the last section concludes the article.

Review of Literature

Growth potential indicates the ability of a firm to generate higher profits, expand its business, and increase its production in the future. A growth firm tends to grow faster than peer firms and the overall economy. The growth potential is used as an indicator of investment interest by the retail and individual investors. The issue of firm growth has received immense importance in finance literature because of its relevance with the future performance of firms. However, previous literature differed to some extent regarding the measurement of a firm’s growth potential (Ardishvili, 1998; Delmar, 1997; Delmar et al., 2003). A group of literature focused on historical accounting-based measures such as growth in sales, revenue, earnings and others to indicate future growth potentials (Ardishvili, 1998; Delmar, 1997) while the other group of literature focused on market price-based measures of growth potentials such as P/E and MV/BV ratios (Stickney et al., 2007; Wu & Yeung, 2012). Studies that measured firm growth potential based on the market price of stocks emphasized on the aggregate information that market perceived regarding the firm. Stickeney et al. (2007) argued that market price-based measure of growth provides information about the aggregate expectation of market participants’ on the prospect of firms. Moreover, P/E and MV/BV ratios have been used extensively in the finance literature to indicate the growth of firms as an investment strategy (Chan & Lakonishok, 2004; Fama & French, 1992; Lakonishok et al., 1994). Despite having a lot of studies on the growth potential of firms, there is a scarcity of study that focuses on the growth potential of the market leader and market challenger. The study of the growth potential of the market leader and the market follower is important because previous studies found that market challenger usually takes radical strategies compared to the market leader (Sheremata, 2004). To understand the growth potential of the market leader and the market challenger, we need to control factors that are previously found to be related to the firm’s growth potential.

The literature on firm growth has identified important factors, ranging from macro-economic variables to firm-specific factors. Among the latter, the most important is probably firm size. Gibrat (1931) studied French manufacturing firms and found that their growth process was random and independent of size. This assumption of growth independence was later dubbed “Gibrat’s law.” However, empirical research found many violations of Gibrat’s law by showing systematic relationships between growth and size. Most of the studies have found a causal relationship between firm size and growth. Evans (1987), Hart and Oulton (1996), Bigsten and Gebreeyesus (2007), Oliveira and Fortunato (2008, 2006), Bentzen et al. (2012), and others found that firm size is related to growth. Evans (1987) used a sample of US manufacturing firms and found that firm growth diminished at a decreasing rate with firm size. Oliveira and Fortunato (2008) investigated data on Portuguese service sector firms from 1995 to 2001 period and found that firm size and age could explain firm growth. Bigsten and Gebreeyesus (2007) studied firm growth along with firm size, age, and labor productivity and found that smaller firms grew faster than larger firms, even after compensating for the higher attrition rate. Mukhopadhyay and Khalkhali (2010) studied US firms and found that larger firms grew faster. Hart and Oulton (1996) provided a comprehensive explanation of the growth–size relationship by examining 87,000 companies, finding the relationship to be negative for small firms and nonexistent for large firms. Bentzen et al. (2012) used data on 2,500 Danish firms covering 1990 and 2004 and found that firm size was related to growth. Unlike other studies, however, they found the relationship to be positive. Morone and Testa (2008) also found a positive relationship between firm growth and size for 2,600 Italian small and medium-sized firms (SMEs).

Besides size, investment in R&D can also make a significant contribution to firm growth. Investment in R&D increases future cash flow, thus ensuring firm growth (Connolly & Hirschey, 2005). Hall (1987) found that investment in R&D contributed more to firm growth than physical investment. Chahine et al. (2007) examined the relationship between firm growth opportunities and R&D using data for 831 IPO-listed firms from 1986 to 1998 in the UK, France, Germany, and Italy. They found that growth opportunities were positively related to investment in R&D and negatively related to financial leverage and firm size. As did several other recent studies, however, they also found that the relationship between R&D investment and growth opportunities was controlled by other factors, like firm size and leverage.

Financial leverage is the use of debt capital to finance investments in assets. The capacity to take on debt may increase firm value and induce growth. The pioneering work of Modigliani and Miller (1958, 1963) showed the link between financial leverage and firm value. Modigliani and Miller posited that firm value increases due to the tax advantage of debt capital. Huynh and Petrunia (2010) found a positive effect of financial leverage on firm growth for new Canadian firms. Bei and Wijewardana (2012) studied Sri Lankan listed firms to examine the relationship between financial leverage and firm growth. They found that financial leverage was positively related to firm growth. However, the naïve, Modigliani–Miller-type relationship between financial leverage and value is often challenged from the viewpoint of the debt overhang problem. Myers (1977) showed that a firm’s debt overhang problem may restrict its ability to raise funds to finance positive net present value (NPV) investments, which could deter growth. Lang et al. (1996) found that the relationship between financial leverage and firm growth was complex. They found a negative relationship between leverage and future growth at both the firm and business segment levels for diversified firms; however, the negative relationship between leverage and growth existed only for firms with a low Tobin’s q ratio. They concluded that financial leverage was positively related to growth for firms with good investment opportunities, while a negative relationship existed for firms whose growth opportunities were impeded by debt overhang or were not recognized in the capital markets. Opler and Titman (1994) also found the relationship between sales growth and financial leverage to be negative for firms in distressed industries; for firms in non-distressed industries or that were large, however, the relationship between sales growth and financial leverage was positive.

Firms’ profitability–growth relationship is understood to be positive since profitability provides funds for growth and sends signals about the strength of the firm in the market. By earning consistent profits, a firm can grow by investing in profitable ventures, thus achieving internal economies of scale, diversifying, and innovating its products, pursuing profitable mergers and acquisitions, and investing in R&D. However, empirical studies have found that the relationship is not linear. Jang and Park (2011) found that the prior year’s profitability and growth were positively related but that the current and previous year’s growth was negatively related to profitability, showing a nonlinear relationship between firm profitability and growth. The implication is that profits induce growth, but growth hinders further profits. Mwangi (2013) investigated the relationship among sales growth, profitability, and firm value in emerging countries using 69 firms from Kenya, Indonesia, South Africa, and the Philippines. He also found that firm profitability increased with sales growth but that further sales growth had a negative impact on profitability. Mukhopadhyay and Khalkhali (2010) studied the dynamics of profitability, size, and growth among US firms, finding that higher profitability did not induce growth for small firms.

The availability of the funds needed to support firm growth is an important consideration in the liquidity–growth relationship. This relationship is often intertwined with the age of the firm. New firms face more outside fund constraints than older firms do. As a result, they rely more on internally generated funds. Oliveira and Fortunato (2006) studied the linkage between firm growth and liquidity constraints for Portuguese firms from 1990 to 2001, finding that smaller and younger firms were more sensitive to growth in cash flow. However, like other variables that affect firm growth, liquidity has a mixed impact on growth. Myers and Rajan (1998) summarized the possible implications of liquidity for firm growth. Liquidity induces growth through its ability to support investment but may impede growth because firms with excess liquidity may end up taking less debt. Opler et al. (1999) investigated firms’ holding of liquid assets using data on US non-financial firms covering 1952 to 1994, finding a positive relationship between liquid asset holding and growth opportunities. However, Anderson (2002) studied the UK and Belgian firms and found that high liquidity among firms slowed their growth.

Firm age can have either a positive or negative influence on growth potential. Number of years of operation is associated with more opportunities and abilities, providing a positive impact on future growth. On the other hand, the learning process hypothesis posits that young firms face more uncertainty about their optimal size, leading to higher growth in earlier stages. This negative relationship is also supported by the firm life-cycle hypothesis, whereby firm growth decreases with age. Evans (1987) and Hall (1987) documented the age–growth relationship and the growth–size linkage, finding that firm growth was negatively related to firm age. Navaretti et al. (2012) examined data on the growth–age linkage for French, Italian, and Spanish manufacturing firms covering 2001 to 2008. They also concluded that young firms grew faster than old ones. Dunne and Hughes (1994) also found a negative association between firm growth and age.

Data and Methodology

Data

The sample period of this study ranges from 2001 to 2016. Data were collected from the Nikkei NEEDS Financial Quest database, Mergent online, and Yahoo Finance. Balance sheet and income statement data were collected from the Nikkei NEEDS Financial Quest database and the Mergent online while stock price data were collected from the Yahoo Finance. The study uses 16 data points for each firm and each variable. The data were cross-checked using raw data obtained from companies’ financial statements and online stock trading records. We also created a subsample that excluded the financial crisis years of 2007 and 2008. The reason for excluding the financial crisis years of 2007 and 2008 is to ensure that results obtained from the whole sample are consistent and are not affected by the financial crisis, which influenced the financial performance of the global firms.

Methodology

The variables used in this study to proxy growth potential, firm’s position in the market, firm size, profitability, liquidity, leverage, cash flow, and age were calculated using the standard procedure followed by previous studies discussed in the literature review in order to maintain consistency among the results (Bentzen et al., 2012; Bigsten & Gebreeyesus, 2007; Chan & Lakonishok, 2004; Connolly & Hirschey, 2005; Mukhopadhyay & Khalkhali, 2010; Stickeney et al., 2007). Descriptive analysis, mean-comparison testing, and subsample analysis were performed to observe the performance of NTT and KDDI concerning the variables that may affect growth. The descriptive statistics show the average, standard deviation, maximum and minimum values of the dependent and independent variables. The mean comparison test has been used to compare the historical performance of the market leader and the market challenger with regard to the growth variables as well as other control variables. We used t statistics to measure the significance of the difference of performance between the market leader and the market challenger. Subsample analysis has been conducted to examine the consistency of the results obtained from the whole sample period.

Multiple regression models were used to examine the growth potential of the market leader and challenger, while controlling for factors that could influence growth potential. In the regression models, growth potential, measured by the P/E and MV/BV ratios, was used as the dependent variable. A market leader dummy, taking a value of 1 if the firm was a market leader and 0 otherwise, was used as the independent variable. Size, profitability, liquidity, leverage, cash flow, and age were used to control for important firm features. We used four models to examine the growth potential of the market leader and challenger. In model 1, the P/E ratio was used as a dependent variable, and the market leader dummy was used as an independent variable, but no control variable was used in order to observe the independent effect of the firms’ position on their growth potential. In model 2, the P/E ratio was used as a dependent variable, the market leader dummy was used as an independent variable, and size, profitability, liquidity, leverage, cash flow, and age were used as control variables. In model 3, we used the MV/BV ratio as a dependent variable and used the same independent and control variables that were used in model 2. Model 3 was used to verify if our results were robust against the choice of method used to measure growth potential. In all three models, we used a sample period from 2008 to 2016 because the public trading of KKDI stocks began in 2008. In a further robustness check, however, we used model 4 on a sample period of 2001–2016, where the P/E ratio was used as a dependent variable, the market leader dummy was used as an independent variable, and size, profitability, liquidity, leverage, cash flow, and age were used as control variables. The general form of the regression models was as follows:

G P_{i t} = α + β_{1} M a r k e t l e a d e r d u m m y_{i t} + β_{2} S i z e_{i t} + β_{3} L i q_{i t} + β_{4} L e v_{i t} + β_{5} P r o f i t_{i t} + β_{6} C F_{i t} + β_{7} A g e_{i t} + ε_{i t}

(1)

Definition of Variables and Measurement Issues

To examine the growth potential of the market leader and challenger, we used growth variables as dependent variables, the firm’s status as a market leader or challenger as the independent variable, and several firm-specific features as control variables.

Concerning the growth variables, the P/E and market-to-book value of equity were used to proxy for growth potential (Chan & Lakonishok, 2004; Stickeney et al., 2007). The P/E and MV/BV ratios compare the book values of equity and earnings with current market prices reflecting investor perceptions of firm prospects. A market leader dummy was used as an independent variable, taking a value 1 if the firm was the market leader and 0 otherwise. We hypothesized that the growth potential of the market challenger was higher than that of the market leader. We thus expected a significantly negative effect of the dummy variable. We used several variables to control for the effect of firm size, liquidity, profitability, leverage, cash flow, and age on growth potential. Total assets were used to proxy for firm size (Coles et al., 2006; Dunne & Hughes, 1994). Following the assumption that small firms grow faster than large ones, we hypothesized that size influenced firm growth negatively. Current ratio, calculated as the ratio between current assets and current liabilities, was used as a measure of firm liquidity (Eljelly, 2004; Mateev & Anastasov, 2010). Liquidity can affect firm growth either positively or negatively depending on the nature of the firm. Liquidity positively affects new and small firms facing external financing constraints. Both NTT and KDDI are mature firms and have sufficient financing options. Excess liquidity is thus hypothesized to deter their growth. The debt-to-equity ratio was used to proxy for the firms’ leverage position (Ross et al., 2002). Following Modigliani and Miller’s (1958, 1963) proposition on leverage and subsequent revision for corporate taxes, this study assumed that financial leverage had a positive effect on growth. Return on equity, measured as the ratio of net profits to total equity, was used to proxy for firm profitability (Yoon & Jang, 2005). Assuming the ability of profits to generate growth funds, this study assumed that profitability had a positive effect on firm growth. Free cash flow, which is used as a proxy for cash flow (Jensen, 1986), was calculated by adjusting tax, depreciation, and amortization, change in net working capital, and capital expenditure with earnings before interest and tax (EBIT). Free cash flow indicates the ability of a firm to generate cash for investment in growth. This study assumed that free cash flow affected growth positively. Number of years of operation was used to proxy for firm age (Evans, 1987; Navaretti et al., 2012). This study followed the assumption of the learning process and life cycle hypothesis whereby younger firms grow faster than older ones. Thus, a negative impact of firm age on growth potential was expected. Table 1 presents the definitions and measurements of the variables used in this study.

Table 1.

Summary of Variables Used in This Study and Their Predicted Influence on Growth Potential.

Variables	Measurement	Predicted Sign
Growth potential	Market price of stock divided by earnings per shareMarket value divided by book value of equity	Dependent variable
Dummy	1 = Market leader, 0 = market challenger	–
Firm size	Logarithm of total assets	–
Current ratio	Current asset divided by current liabilities	–
Leverage	Debt divided by equity	+
Profitability	Net profit divided by total equity	+
Cash flow	Free cash flow per share	+
Age	Number of years of operation	-

Source: The authors.

Empirical Findings

Descriptive Statistics and Comparison of Means

Tables 2 and 3 show the descriptive statistics of the key operating and financial variables concerning NTT and KDDI for the whole sample and two subsamples. We excluded the financial crisis period of 2007 and 2008 to produce one subsample representing the 2001–2006 period and another representing the 2009–2016 period. Since the telecommunications services industry of Japan is globally linked and both NTT and KDDI have global operations, it is highly likely that the financial performances of these two companies are influenced by the global financial crisis. Thus, we created two subsamples after excluding the financial crisis periods to ensure that our results are consistent and not biased due to the global financial crisis. In unreported analysis, we applied the Jerque–Berra (JB) tests on the variables and found that all variables are normally distributed.

The results show that growth potential, as measured by the P/E, is significantly higher for KDDI than for NTT at a less than 10% significance level (t =1.71). Moreover, the growth potential of KDDI is higher than that of NTT both before and after the financial crisis (2007–2008). Although KDDI has significantly higher growth potential than NTT, its potential decreases over time. Growth potential for NTT also decreases over time, indicating that the financial crisis negatively impacts both companies. Our alternative measure of growth potential, the market-to-book-value ratio, is also significantly higher for KDDI than for NTT at a less than 1% significance level (t = 5.59). As was the previous measure of growth potential, the MV/BV ratio of KDDI is higher than that of NTT both before and after the financial crisis. Thus, both measures of growth potential produce similar results for the market leader and the challenger. Firm size, as measured by the natural logarithm of total assets, is significantly higher for NTT than for KDDI at a less than 1% significance level (t = 14.63). An increasing size trend is observed for KDDI but not for NTT. The size of NTT actually decreases from its pre-financial crisis state. Liquidity performance, as measured by the current ratio, is also significantly higher for KDDI than for NTT at a less than 5% significance level (t = 2.54), although both companies have a current ratio of more than 1. While the liquidity of NTT is quite stable over the sample period, KDDI’s liquidity increases considerably in the post-crisis period. The leverage position, as measured by the debt–equity ratio, differs significantly between NTT and KDDI: the latter is more levered over the whole sample period. However, both companies reduced their use of leverage after the financial crisis period; this reduction is more acute for KDDI. Free cash flow per share is larger for KDDI than for NTT; KDDI also has more free cash flow relative to company size. However, the difference in free cash flow per share between KDDI and NTT is not statistically significant. Profitability, as measured by return on equity, is significantly higher for KDDI at a less than 1% significance level (t = 3.37). Finally, age, as measured by the number of years in operation, is significantly higher for NTT at a less than 1% significance level (t = 19.01). The mean comparison tests show that growth potential, profitability, liquidity, and leverage are significantly higher for the market challenger than for the leader. These results support our hypothesis that the growth potential of the market challenger is significantly higher and that they hold more liquidity and use more leverage.

Table 2.

Descriptive Statistics of Key Variables.

Variable	Mean	Std. Dev.	Min	Max
NTT
MV/BV	1.018	0.266	0.609	1.461
P/E	14.905	6.295	10.217	35.298
Current ratio	104.409	20.584	64.910	154.580
Debt–equity ratio	60.635	7.723	49.470	77.570
Free cash flow per share	14294.690	51191.170	−129000.400	84750.740
Size of firms	15.876	0.078	15.765	16.019
Return on equity	5.829	3.648	1.580	14.71
Age of firm	57	5	49	64
KDDI
MV/BV	2.035	0.677	1.042	2.910
P/E	28.472	31.097	8.702	125.798
Current ratio	131.316	36.957	83.050	232.550
Debt-equity ratio	92.254	39.594	37.600	177.300
Free cash flow per share	29286.080	44967.920	−41411.160	95910.460
Size of firms	14.950	0.241	14.647	15.292
Return on equity	10.731	4.546	−1.960	14.520
Age of firm	25	5	17	32
Mean comparison of variables
	Mean Difference	t Value
MV/BV	−1.017	−5.59^***
P/E	−13.567	−1.711^*
Current ratio	−26.907	−2.54^**
Debt-equity ratio	−31.619	−3.14^***
Free cash flow per share	−14991.4	−0.88
Size of firms	0.925	14.63^***
Return on equity	−4.903	−3.365^***
Age of firm	32	19.01^***

Source: The authors.

Notes: 1. Current ratio, debt–equity ratio, and return on equity are shown in percentage form.

2. t statistics in parentheses. ***, **, and * represent significance at the 1%, 5%, and 10% levels, respectively.

Table 3.

Subperiod Analysis.

NTT	MV/BV	P/E	Current Ratio	D/E Ratio	FCF Per Share	Size of Firms	Return on Equity	Age
2001–2016	1.018	14.905	104.409	60.635	14294.687	5.829	3.031	57
2001–2006	1.232	18.099	103.882	66.517	21671.855	4.627	1.792	52
2009–2016	0.834	12.479	103.121	57.258	450.695	7.226	3.941	61
KDDI
2001–2016	2.035	28.472	131.316	92.254	29286.083	10.731	11.138	25
2001–2006	2.267	50.285	116.650	131.315	56131.803	7.023	7.503	20
2009–2016	1.851	15.098	151.754	66.738	8387.049	12.856	13.339	29

Source: The authors.

Note: Current ratio, debt–equity ratio, and return on equity are shown in percentage form.

Regression Analysis

Table 4 shows the results of the regression models used to examine the growth potential of the market leader and challenger. We used several specifications in our study because we used two dependent variables and tested the consistency of our results over time. Model 1 examined the independent role of the market leader dummy in growth potential as measured by the P/E. The significance of F test at a less than 1% significance level (F = 15.15) shows the overall fitness of the model. The adjusted R² value shows that 46.12% variability of the growth potential can be explained by the position of the firm in the market. The regression results show that the market leader dummy is significantly negative at a less than 1% significance level (t = −3.94), indicating that the market challenger has more growth potential in Japan’s telecommunications services industry. Model 2 used the P/E to measure growth potential, the market leader dummy as an independent variable, and firm size, liquidity, profitability, leverage, cash flow, and age as control variables. The significance of F test at a less than 1% significance level (F = 7.03) shows the overall fitness of the model. The adjusted R² value shows that 71.28% variability of the growth potential can be explained by the explanatory variables. The results show that the market leader dummy is significantly negative at a less than 5% significance level (t = −2.62), even after controlling for firm-specific features. Thus, the market challenger has higher growth potential irrespective of the firms’ size, liquidity, profitability, leverage, cash flow, and age. Among the control variables, we find that leverage has a significantly negative impact on growth potential after controlling for the firms’ competitive position and other features at a less than 5% level of significance (t = −2.56).

To check the robustness of our results, we used the MV/BV ratio as an alternative measure of growth potential. Model 3 uses MV/BV as the dependent variable, the market leader dummy as an independent variable, and firm size, liquidity, profitability, leverage, cash flow, and age as control variables. The results show that the significantly negative effect of the market leader dummy remains even when using an alternative measure of growth potential and when other firm-specific features are controlled for. Thus, the market challenger’s higher growth potential is robust against the method of measuring growth potential. Among the control variables, liquidity has a significantly negative impact on growth potential after the firm’s competitive position and other features are controlled for at a less than 10% significance level (t = −1.83).

We also checked the robustness of our results using a longer sample period. In models 1–3, we used a sample period of 2008–2016, since the KDDI went public in 2008. In model 4, we used a sample period of 2001–2016 to observe whether the effect of the market leader dummy remained unchanged. In model 4, we used the P/E as the dependent variable, the market leader dummy as the independent variable, and firm size, liquidity, profitability, leverage, cash flow, and age as control variables. The results show that the market leader dummy is significantly negative at a less 5% significance level (t = −2.19) even after firm-specific features are controlled for. Thus, the market challenger’s higher growth potential is evident even over a longer sample period. Among the control variables, leverage has a significantly positive impact on growth potential at a less than 1% significance level (t = 4.33) after the firm’s competitive position and other features are controlled for.

In summary, our study reveals the higher growth potential of the market challenger even after controlling firm-specific factors. Our study provides empirical evidence on the argument of Sheremata (2004) that market challengers usually take radical strategies compared to market leaders. We argue that the higher growth potential of the market challenger comes from radical and challenging strategies. Although our findings are based on the evidence of a single industry, the higher growth prospect of the telecommunications services industry rationalizes our focus on a single industry. A recent study shows that the telecommunications services industry is one of the most competitive and evolving industry in Japan (OG Analysis, 2019). Although the industry is heavily controlled by the two giant companies such as the NTT and KDDI, other companies also make their best effort to capture some market share making the industry competitive. Being one of the most growing industry in Japan, the telecommunications services industry seems to be a good case of examining the market leader and the challenger. Since we are focusing on the growth potential, we did not include industries that are stagnant or having negative growth. In Japan, most of the industries are facing stagnation over the years, which is reflected in the sluggish growth of the national economy (Amadeo, 2019).

The findings of our study need to be discussed from the viewpoint of the financing background of the telecommunications services industry as well. The telecommunications services industry is a capital-intensive industry and like most other industries in Japan, telecommunications services companies largely depend on the bank loan and other forms of debts for financing their operations. Nevertheless, issuance of stocks has been a prioritized source of capital for most of the companies in recent times including telecommunications services companies. The growth ratios used in this study compares the market price and earnings (and the market value of equity and the book value of equity) of the market leader and the market challenger. Both the measures compare market perceived values with book values, which also indicates whether investors perceive the value of the company more than the book value. Given both firms’ dependence on debt financing, higher growth ratios indicate challenger firm’s higher growth potential compared to the market leader. It also indicates that investors are willing to pay a premium for the challenger firm’s future growth potential.

Table 4.

Regression Estimates of Factors Affecting Growth Potential of NTT and KDDI.

	Model 1	Model 2	Model 3	Model 4
Market leader dummy	−0.980(−3.94)^***	−5.145(−2.62)^**	−46.136(−2.39)^**	−75.097(−2.19)^**
Size		1.02e−07(0.15)	1.89e−06(0.29)	6.56e−06(1.43)
Profitability		−0.006(−0.07)	0.115(0.14)	−1.315(−1.30)
Liquidity		−0.007(−1.43)	−0.095(−1.83)^*	0.044(0.46)
Leverage		−0.031(−2.56)^**	−0.197(−1.64)	0.788(4.33)^***
Cash flow		1.42e−06(0.39)	6.96e−06(0.19)	−0.000(−0.89)
Age		0.097(0.86)	0.983(1.17)	1.559(2.11)
Constant	1.833(10.42)^***	2.013(0.86)	5.853(0.26)	−93.821(−2.15)^**
F	15.15^***	7.03^***	2.08	11.70^***
Adjusted R²	0.4612	0.7128	0.3070	0.7072
n	18	18	18	32

Source: The authors.

Notes: t statistics in parentheses. ***, **, and * represent significance at the 1%, 5%, and 10% levels, respectively.

Conclusion

This study examines the growth potential of the market leader and challenger in Japan’s telecommunications services industry. In terms of sales revenue, total assets, and market share, NTT is the market leader and KDDI the challenger. We hypothesized that the growth potential of the market challenger is higher than that of the market leader because the challenger needs to use strategies that are more aggressive than what the market leader requires.

A comparison of means shows that the growth potential of the market challenger is significantly higher than that of the market leader. The challenger also has more liquidity, profitability, cash flow, and leverage than the leader. For obvious reasons, however, the size and age of the market leader are greater than those of the challenger. We used several regression models to find that the market challenger’s growth potential is higher than that of the market leader. Using the P/E and MV/BV as indicators of growth potential, we provide evidence 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. Our results are robust against the choice of method used to measure growth potential and are consistent over time.

Our study has a limitation that should be considered while interpreting the results. Our study concludes about the growth potential of the market leader and the market challenger based on the evidence of a single industry, which could make the conclusion overgeneralized. We did not include other industries in our study because their inclusion could produce biased results due to different level of growth status. We believe that being one of the most evolving and growing industries in Japan, examining the growth potential of the market leader and the market challenger from the telecommunications services industry provide insightful conclusions although we do not rule out the possibility of overgeneralization.

Footnotes

Declaration of Conflicting Interests

Funding

The authors received no financial support for the research, authorship and/or publication of this article.

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