Using data from 43 countries for the period of 1992-2018, we show that the degree of external funding of corporate growth opportunities (i.e., capital allocation) explains the cross-country difference in firm value more than profitability (i.e., capital cumulation). We measure the two and their relative importance using the cross-sectional relation between free cashflows and firm value in a country (FCF beta). Specifically, a proper funding of growth opportunities in a country makes the country’s FCF beta more negative, whereas the appreciation of profits available for payouts make the FCF beta more positive. Our finding is that, in the cross-section, countries with a more negative FCF beta have a higher valuation. The negative relation is sharper (absent) when the two are estimated only with growth (mature) firms, further confirming the role of growth opportunities.

Keywords: Valuation; Country; Growth opportunities; Free cashflow
JEL classification: F30; F65; G30