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

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

doi:10.1017/s0022109019000619

Cited by 33 publications

(12 citation statements)

References 89 publications

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“…In addition to the above variables, we also control for the firm's age (

Age

) as the growth potential of firms typically falls as they grow older. Further, we control for the maximum daily return as a successful exercise of uncertain growth option can lead to a high lottery payoff (Bali et al, 2020). Table 13 reports the results.…”

Section: Resultsmentioning

confidence: 99%

The bias of growth opportunity

Gong

Luo

et al. 2021

Euro Fin Management

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The bias of growth opportunity (BGO), measured as the difference between market and fundamental values of a firm's growth opportunity, has an ability to predict future stock returns. In the portfolio sort, downwardbiased BGO firms earn higher returns than upwardbiased ones, which is unexplained by the common asset pricing models. Cross-sectional regression results also confirm BGO's power in predicting stock returns. To explain the anomaly, we show that the BGO premium is more pronounced when investor sentiment is high or when limits-to-arbitrage is severe, which suggests that the BGO is more likely to capture behavioural biases than systematic risk.

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“…In addition to the above variables, we also control for the firm's age (

Age

Section: Resultsmentioning

confidence: 99%

The bias of growth opportunity

Gong

Luo

et al. 2021

Euro Fin Management

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“…Empirical evidence on the determinants of (real) growth options has shown that firm‐specific characteristics and heterogeneity are more important drivers of GO value than industry and country effects (Tong and Reuer, 2006; Tong et al ., 2008). Examples of firm‐specific factors investigated in extant research include: size (Koussis and Makrominas, 2015), leverage (Trigeorgis and Lambertides, 2014), incentives (Alessandri, Tong and Reuer, 2012), organisational slack (Tong and Reuer, 2007), multinationality and investment modes (Belderbos, Tong and Wu, 2019), cash position (Trigeorgis and Lambertides, 2014) and return skewness (Bali et al ., 2019). However, absent from the real options literature are studies on the behavioural antecedents of corporate growth options, and how managerial characteristics contribute to real growth options value.…”

Section: Introductionmentioning

confidence: 99%

Ambiguity, Managerial Ability, and Growth Options

Driouchi

Chen

Lyu

et al. 2021

British J of Management

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This paper studies the role of ambiguity and managerial ability in firm growth options from the perspective of behavioural theory. We argue that managerial ability increases both the identification and exploitation of growth options opportunities, but ambiguity reduces strategic growth options value as a result of information incompleteness and non‐Bayesian behaviour. Using a dataset of all US‐listed firms, we test the joint effects of ambiguity and managerial ability on growth options value after controlling for standard determinants and endogeneity. The results indicate that ambiguity has a negative effect on growth options value, while ability has a positive effect. We also find that the negative association between ambiguity and growth options is less pronounced with higher managerial ability. These findings underscore the importance of firm heterogeneity in the identification, exercise, and management of strategic and innovative real options opportunities. The paper's contribution provides relevant management insights into the behavioural antecedents of real options at the firm level as well as highlights that managerial and behavioural characteristics are important determinants of growth options value.

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“…6 6 Although my argumentation is based on Bali et al . 's (2020) real options theory, the two studies are substantially different. Specifically, Bali et al .…”

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confidence: 97%

“…Specifically, Bali et al . (2020) use this theory to provide a rational explanation for the growth anomaly in general, whereas the present study goes a step further to examine whether the growth anomaly is driven by undervalued or overvalued firms.…”

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confidence: 98%

“…The first possible explanation for the asset growth anomaly is derived from literature on real options. This theory suggests that higher uncertainty underlying growth stocks, combined with managerial, organizational, and financial flexibility that result in more asymmetric returns, is reflected positively ex ante in current prices and justifies lower required or subsequent average returns for growth stocks (Bali et al ., 2020). 5 This real options view contradicts standard mean‐variance portfolio theory in asset pricing, that is, that uncertainty should be considered as a penalty for which shareholders require a higher return, as one might expect for established value stocks.…”

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confidence: 99%

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Misvaluation and the Asset Growth Anomaly

Lambertides

2021

Abacus

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It is widely shown that stocks with higher asset growth paradoxically earn lower returns (hereafter, the asset growth anomaly). Studies have pointed towards errors in expectations, over‐investment and limits‐to‐arbitrage as potential causes of misvaluation, the most documented explanation of the asset growth anomaly. What studies have not yet done, however, is provide compelling evidence that mispricing is the cause of the anomaly. Using a multiples valuation approach to calculate a direct proxy of mispricing (i.e., a firm‐specific misvaluation level relative to peers), this study shows that the negative relation between asset growth and subsequent returns occurs in undervalued stocks, whereas it is absent in overvalued stocks. By comparing and contrasting the theories on real options and asset pricing, the findings suggest that the asset growth anomaly is driven by the real options component, particularly for undervalued firms. The findings therefore provide new evidence in the mispricing‐based hypothesis for the asset growth anomaly.

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

Cited by 33 publications

References 89 publications

The bias of growth opportunity

The bias of growth opportunity

Ambiguity, Managerial Ability, and Growth Options

Misvaluation and the Asset Growth Anomaly

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