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Growth options, option exercise and firms’ systematic risk

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  • Nicos Koussis
  • Michalis Makrominas

Abstract

We develop and empirically test a theoretical model which analyzes the impact of growth options, profitability, and operating and financial leverage on equity’s systematic risk. Conditioning on the relative magnitude of advertising expenditure to research and development (R&D) expenditure, we find that higher beta is associated with higher return volatility, lower book to market ratio, lower return on assets, higher operating and financial leverage, and larger market capitalization (Size). Conditioning on R&D intensity, we show that an increase in the moneyness of firm options, or the exercise of firm options (approximated by increases in capital expenditure, advertising expenditure or profitability) result in more significant decreases in beta. Dynamically estimated high-frequency betas appear to perform well in capturing variation in firm systematic risk associated with growth option factors. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Nicos Koussis & Michalis Makrominas, 2015. "Growth options, option exercise and firms’ systematic risk," Review of Quantitative Finance and Accounting, Springer, vol. 44(2), pages 243-267, February.
    • Handle: RePEc:kap:rqfnac:v:44:y:2015:i:2:p:243-267
    DOI: 10.1007/s11156-013-0405-5
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    Cited by:

    1. Liu, Hao & Zhang, Hao & Gao, Ya-Chun & Chen, Xu-Dong, 2022. "Firm age and beta: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 244-261.

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    More about this item

    Keywords

    Beta; CAPM; Real options; R&D; Advertising; Capital expenditure; G31; G32;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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