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Growth Options and Related Stock Market Anomalies: Profitability, Distress, Lotteryness, and Volatility

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  • Bali, Turan G.
  • Del Viva, Luca
  • Lambertides, Neophytos
  • Trigeorgis, Lenos

Abstract

We provide new evidence on the economic role of growth options behind the profitability, distress, lotteryness, and volatility anomalies. We use idiosyncratic skewness to measure growth options and estimate expected idiosyncratic skewness capturing investors’ expectations about the firm’s mix of growth options versus assets-in-place. We find that investors require a positive premium to hold stocks of inflexible firms with low growth options and negative expected skewness and that a newly proposed skewness factor based on growth options explains the aforementioned anomalies. Thus, the new measure of expected idiosyncratic skewness may serve to reduce the number of anomalies in the literature.

Suggested Citation

  • Bali, Turan G. & Del Viva, Luca & Lambertides, Neophytos & Trigeorgis, Lenos, 2020. "Growth Options and Related Stock Market Anomalies: Profitability, Distress, Lotteryness, and Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(7), pages 2150-2180, November.
    • Handle: RePEc:cup:jfinqa:v:55:y:2020:i:7:p:2150-2180_3
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    Citations

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    Cited by:

    1. Liu, Hao & Chen, Yue & Wan, Wei & Zhang, Qun, 2021. "A novel explanation for idiosyncratic volatility anomaly: An asset decomposition perspective," Economics Letters, Elsevier, vol. 206(C).
    2. Andrea Gamba & Alessio Saretto, 2022. "Endogenous Option Pricing," Working Papers 2202, Federal Reserve Bank of Dallas.
    3. Yin, Libo & Lu, Man, 2022. "Oil uncertainty and firms' risk-taking," Energy Economics, Elsevier, vol. 108(C).
    4. Barinov, Alexander, 2023. "Profitability anomaly and aggregate volatility risk," Journal of Financial Markets, Elsevier, vol. 64(C).
    5. Yin, Libo & Yang, Zhichen, 2022. "The profitability effect: Insight from a dynamic perspective," International Review of Financial Analysis, Elsevier, vol. 80(C).
    6. Neophytos Lambertides, 2022. "Misvaluation and the Asset Growth Anomaly," Abacus, Accounting Foundation, University of Sydney, vol. 58(1), pages 105-141, March.
    7. 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).
    8. Joshua Traut, 2023. "What we know about the low-risk anomaly: a literature review," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 37(3), pages 297-324, September.

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