Article

Explaining the Growth Potential Business Perspectives and Research

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of a Market Leader and © 2021 K.J. Somaiya Institute of
Management Studies and Research
Challenger: Evidence from Japan’s Reprints and permissions:
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Telecommunications Services DOI: 10.1177/2278533721989522
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Industry

Mostafa Saidur Rahim Khan1 and Naheed Rabbani2

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

1 School of Economics, Hiroshima University, 1-2-1 Kagamiyama, Higashi Hiroshima, Hiroshima, Japan.
2 Department of Banking and Insurance, University of Dhaka, Dhaka, Bangladesh.

Corresponding Author:
Mostafa Saidur Rahim Khan, School of Economics, Hiroshima University, 1-2-1 Kagamiyama, Higashi Hiroshima, Hiroshima
739-8525, Japan.
E-mail: [email protected]
2 Business Perspectives and Research

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.
Khan and Rabbani 3

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
4 Business Perspectives and Research

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.
Khan and Rabbani 5

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
6 Business Perspectives and Research

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
Khan and Rabbani 7

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:
GPit = α + β1Market leader dummyit + β2Sizeit + β3Liqit + β4Levit + β5Profitit + β6CFit + β7Ageit + εit(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
8 Business Perspectives and Research

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.

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

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 Dependent variable
earnings per shareMarket value
divided by book value of equity
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.
Khan and Rabbani 9

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
(Table 2 Continued)
10 Business Perspectives and Research

(Table 2 Continued)

Variable Mean Std. Dev. Min Max

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.

Current D/E FCF Per Size of Return on
NTT MV/BV P/E Ratio Ratio Share Firms 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
Khan and Rabbani 11

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.

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
12 Business Perspectives and Research

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.

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.
Khan and Rabbani 13

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of
this article.

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

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