Growth options, option exercise and firms’ systematic risk

Growth options, option exercise and firms’ systematic risk 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Growth options, option exercise and firms’ systematic risk

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Publisher
Springer US
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-013-0405-5
Publisher site
See Article on Publisher Site

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.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Sep 26, 2013

References

  • Empirical evidence on capital investment, growth options, and security returns
    Anderson, CW; Garcia‐Feijóo, L
  • Growth options, beta and the cost of capital
    Bernardo, AE; Chowdhry, B; Goval, A

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