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Growth Options and Related Stock Market Anomalies: Profitability, Distress, Lotteryness, and Volatility

Published online by Cambridge University Press:  22 August 2019

Turan G. Bali ,
Luca Del Viva Open the ORCID record for Luca Del Viva [Opens in a new window] ,
Neophytos Lambertides  and
Lenos Trigeorgis
Turan G. Bali*
Affiliation:
Bali, turan.bali@georgetown.edu, Georgetown University McDonough School of Business
Luca Del Viva
Affiliation:
Del Viva, luca.delviva@esade.edu, Ramon Llull University ESADE Business School
Neophytos Lambertides
Affiliation:
Lambertides, n.lambertides@cut.ac.cy, Cyprus University of Technology
Lenos Trigeorgis
Affiliation:
Trigeorgis, lenos@mit.edu, University of Cyprus, King’s College London, and visiting scholar MIT Sloan School
*
Bali (corresponding author), turan.bali@georgetown.edu
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Abstract

We provide new evidence on the economic role of growth options behind the profitability, distress, lotteryness, and volatility anomalies. We use idiosyncratic skewness to measure growth options and estimate expected idiosyncratic skewness capturing investors’ expectations about the firm’s mix of growth options versus assets-in-place. We find that investors require a positive premium to hold stocks of inflexible firms with low growth options and negative expected skewness and that a newly proposed skewness factor based on growth options explains the aforementioned anomalies. Thus, the new measure of expected idiosyncratic skewness may serve to reduce the number of anomalies in the literature.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 7 , November 2020 , pp. 2150 - 2180
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We are grateful for helpful comments and suggestions from an anonymous referee, Nicholas Baltas, Colin Clubb, Jennifer Conrad (the editor), George Constantinides, John Core, K. Ozgur Demirtas, Irene Karamanou, S. P. Kothari, Andreas Milidonis, Nikos Vafeas, and Kamil Yilmaz. We also benefited from discussions with seminar participants at the Multinational Finance Society Conference, Aalto University, ESADE Business School, Koc University, and Sabanci University. We thank Kenneth French, Lubos Pastor, and Robert Stambaugh for making data publicly available in their online data library. The financial support of AGAUR – SGR 2017-640, Banco Sabadell, and the Spanish Ministry of Science, Innovation and Universities (grant PGC2018–099700-A-100) is also acknowledged. All errors remain our responsibility.

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