Growth Options and Related Stock Market Anomalies: Profitability, Distress, Lotteryness, and Volatility. (November 2020)

• Record Type: Journal Article
• Authors: Bali, Turan G.; Del Viva, Luca; Lambertides, Neophytos; Trigeorgis, Lenos
• Is Part Of: Journal of financial and quantitative analysis. Volume 55:Number 7(2020)
• Page Start: 2150
• Page End: 2180
• Publication Date: 2020-11
• Subjects: Finance -- Periodicals; Investments -- Mathematics -- Periodicals; 332.05
• DOI: 10.1017/S0022109019000619
• Languages: English
• ISSNs: 0022-1090

Abstract

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.