The Bias of Growth Opportunity
47 Pages Posted: 7 Mar 2019 Last revised: 21 Mar 2021
Date Written: February 2, 2020
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: Suggested Citation