Growth Opportunities and Assets in Place: Implications for Equity Betas
Boston College Working Paper
35 Pages Posted: 7 Apr 2003
Date Written: August 2001
Price changes can be associated with either increases or decreases in systematic risk. Most of the existing literature focuses on the leverage effect, which suggests that betas decrease (increase) as stock prices increase (decrease). Alternatively, betas may move in the same direction as stock prices if growth opportunities have higher betas and are more volatile than assets in place. Our empirical work indicates that the latter effect dominates, even for a sub-sample of highly levered firms that presumably have relatively fewer growth opportunities. We also link variations in betas to firm characteristics that proxy for the proportion of the firm invested by growth opportunities. These growth opportunity proxies explain a large portion of cross-sectional differences in betas. Finally, we find preliminary evidence that investors may under-react to the decrease in the beta of stocks that have performed particularly poorly.
Keywords: Assets in place, beta, CAPM, growth opportunities, risk premium, size, value
JEL Classification: G11, G12, G13
Suggested Citation: Suggested Citation