IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v52y2017i01p215-241_00.html
   My bibliography  Save this article

Real Options, Idiosyncratic Skewness, and Diversification

Author

Listed:
  • Del Viva, Luca
  • Kasanen, Eero
  • Trigeorgis, Lenos

Abstract

We show how firm-level real options lead to idiosyncratic skewness in stock returns. We then document empirically that growth option variables are positive and significant determinants of idiosyncratic skewness. The real option impact on skewness is more significant in firms with lottery-type features, small size, high volatility, distressed, low return on assets, and low book-to-market ratio. We also find that expectation on idiosyncratic skewness is associated with lower Sharpe ratios. This suggests investors are willing to sacrifice mean-variance portfolio efficiency for greater skewness deriving from real options. Furthermore, financial flexibility has a positive incremental effect, enhancing the beneficial role of asset flexibility on idiosyncratic skewness.

Suggested Citation

  • Del Viva, Luca & Kasanen, Eero & Trigeorgis, Lenos, 2017. "Real Options, Idiosyncratic Skewness, and Diversification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(1), pages 215-241, February.
  • Handle: RePEc:cup:jfinqa:v:52:y:2017:i:01:p:215-241_00
    as

    Download full text from publisher

    File URL: https://www.cambridge.org/core/product/identifier/S0022109016000703/type/journal_article
    File Function: link to article abstract page
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ho, Tuan & Kim, Kirak & Li, Yang & Xu, Fangming, 2023. "Can Real Options Explain the Skewness of Stock Returns?," Journal of Banking & Finance, Elsevier, vol. 148(C).
    2. Andrea Gamba & Alessio Saretto, 2022. "Endogenous Option Pricing," Working Papers 2202, Federal Reserve Bank of Dallas.
    3. Cui, Xiangyu & Guan, Zheng, 2022. "On the pricing of expected idiosyncratic skewness," Economics Letters, Elsevier, vol. 216(C).
    4. Ho, Tuan & Kim, Kirak & Li, Yang & Xu, Fangming, 2023. "Does real flexibility help firms navigate the COVID-19 pandemic?," The British Accounting Review, Elsevier, vol. 55(4).
    5. Andrés, Pablo de & Fuente, Gabriel de la & Velasco, Pilar, 2021. "Exercising a firm’s growth options: A portfolio approach," Journal of Business Research, Elsevier, vol. 132(C), pages 571-585.
    6. Yin, Libo & Lu, Man, 2022. "Oil uncertainty and firms' risk-taking," Energy Economics, Elsevier, vol. 108(C).
    7. Ayadi, Mohamed A. & Cao, Xu & Lazrak, Skander & Wang, Yan, 2019. "Do idiosyncratic skewness and kurtosis really matter?," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    8. Matthias Breuer & David Windisch, 2019. "Investment Dynamics and Earnings‐Return Properties: A Structural Approach," Journal of Accounting Research, Wiley Blackwell, vol. 57(3), pages 639-674, June.
    9. Cookson, J. Anthony, 2018. "When saving is gambling," Journal of Financial Economics, Elsevier, vol. 129(1), pages 24-45.
    10. Bressan, Silvia & Weissensteiner, Alex, 2021. "The financial conglomerate discount: Insights from stock return skewness," International Review of Financial Analysis, Elsevier, vol. 74(C).
    11. Fuente, Gabriel de la & Velasco, Pilar, 2020. "Capital structure and corporate diversification: Is debt a panacea for the diversification discount?," Journal of Banking & Finance, Elsevier, vol. 111(C).
    12. Del Viva, Luca & Kasanen, Eero & Saunders, Anthony & Trigeorgis, Lenos, 2021. "US government TARP bailout and bank lottery behavior," Journal of Corporate Finance, Elsevier, vol. 66(C).
    13. Lin, Mei-Chen, 2023. "Analyst coverage and the idiosyncratic skewness effect in the Taiwan stock market," International Review of Financial Analysis, Elsevier, vol. 85(C).
    14. Easterwood, John C. & Paye, Bradley S. & Xie, Yutong, 2021. "Firm uncertainty and corporate policies: The role of stock return skewness," Journal of Corporate Finance, Elsevier, vol. 69(C).
    15. Murad Antia & Christos Pantzalis & Jung Chul Park, 2021. "Does CEO myopia impede growth opportunities?," Review of Quantitative Finance and Accounting, Springer, vol. 56(4), pages 1503-1535, May.
    16. Panayiotis Theodossiou & Dimitris Tsouknidis & Christos Savva, 2020. "Freight rates in downside and upside markets: pricing of own and spillover risks from other shipping segments," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 183(3), pages 1097-1119, June.
    17. Luca Del Viva & S. P. Kothari & Neophytos Lambertides & Lenos Trigeorgis, 2021. "Asymmetric Returns and the Economic Content of Accruals and Investment," Management Science, INFORMS, vol. 67(6), pages 3921-3942, June.
    18. Agnes Cheng, C.S. & Xie, Jing & Zhong, Yuxiang, 2023. "Common institutional blockholders and tail risk," Journal of Banking & Finance, Elsevier, vol. 148(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:52:y:2017:i:01:p:215-241_00. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kirk Stebbing (email available below). General contact details of provider: https://www.cambridge.org/jfq .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.