The Bias of Growth Opportunity

47 Pages Posted: 7 Mar 2019 Last revised: 21 Mar 2021

See all articles by Cynthia M Gong

Cynthia M Gong

School of Business and Economics, Loughborough University

Xindan Li

Nanjing University

Di Luo

University of Southampton

Huainan Zhao

Loughborough University - School of Business and Economics

Date Written: February 2, 2020

Abstract

The bias of growth opportunity (BGO), measured as the difference between market and fundamental values of a firm's growth opportunity, has an ability to predict future stock returns. In the portfolio sort, downward-biased BGO firms earn higher returns than upward-biased BGO firms, which is unexplained by the common asset pricing models. Cross-sectional regression results also confirm BGO's power in predicting stock returns. To explain the anomaly, we show that the BGO premium is more pronounced when investor sentiment is high or when limits-to-arbitrage is severe, which suggests that the BGO is more likely to capture behavioral biases than systematic risk.

Keywords: Bias of growth opportunity; Behavioral Finance; Asset Pricing; Anomaly

JEL Classification: G12; G14; G30

Suggested Citation

Gong, Cynthia and Li, Xindan and Luo, Di and Zhao, Huainan, The Bias of Growth Opportunity (February 2, 2020). Available at SSRN: https://ssrn.com/abstract=3345899 or http://dx.doi.org/10.2139/ssrn.3345899

Cynthia Gong

School of Business and Economics, Loughborough University ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

Xindan Li

Nanjing University ( email )

Nanjing, Jiangsu 210093
China

Di Luo (Contact Author)

University of Southampton ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

Huainan Zhao

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

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