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

83 Pages Posted: 27 May 2017 Last revised: 28 Mar 2019

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Luca Del Viva

ESADE Business School

Neophytos Lambertides

Cyprus University of Technology

Lenos Trigeorgis

University of Cyprus - Department of Public and Business Administration; King's College London; Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: May 25, 2017

Abstract

Growth options increase idiosyncratic skewness and reduce risk exposure, and thereby create the appearance of profitability, distress, lotteryness, and volatility anomalies, influencing their returns via the channel of idiosyncratic skewness. To capture these effects, we estimate expected idiosyncratic skewness due to growth options reflecting investors’ expectation 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 hence negative expected idiosyncratic skewness, and that a newly proposed skewness factor based on growth options or firm inflexibility explains the aforementioned anomalies.

Keywords: Stock Market Anomalies, Stock Returns, Growth Options, Profitability, Lotteryness, Distress, Idiosyncratic Volatility, Idiosyncratic Skewness

JEL Classification: G10, G11, G12

Suggested Citation

Bali, Turan G. and Del Viva, Luca and Lambertides, Neophytos and Trigeorgis, Lenos, Growth Options and Related Stock Market Anomalies: Profitability, Distress, Lotteryness, and Volatility (May 25, 2017). Available at SSRN: https://ssrn.com/abstract=2974452 or http://dx.doi.org/10.2139/ssrn.2974452

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Luca Del Viva

ESADE Business School ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

Neophytos Lambertides

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Lenos Trigeorgis

University of Cyprus - Department of Public and Business Administration ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
00357 2 338762 (Phone)
00357 2 339063 (Fax)

King's College London ( email )

Strand
London, WC2R 2LS
United Kingdom

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

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