Growth Opportunities and Assets in Place: Implications for Equity Betas

Boston College Working Paper

35 Pages Posted: 7 Apr 2003

See all articles by Eric Jacquier

Eric Jacquier

Boston University School of Management; HEC Montreal - Department of Finance

Atakan Yalcin

Ozyegin University

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: August 2001

Abstract

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

Jacquier, Eric and Yalcin, Atakan and Titman, Sheridan, Growth Opportunities and Assets in Place: Implications for Equity Betas (August 2001). Boston College Working Paper. Available at SSRN: https://ssrn.com/abstract=371881 or http://dx.doi.org/10.2139/ssrn.371881

Eric Jacquier (Contact Author)

Boston University School of Management ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, QC H3T 2A7
Canada

Atakan Yalcin

Ozyegin University ( email )

Nisantepe Mahallesi
Alemdag, Cekmekoy
Istanbul, 34794
Turkey
+90-216-564-9587 (Phone)
+90-216-564-9045 (Fax)

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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