Journal of Financial and Quantitative Analysis Vol. 49 No. 3 2014
The Role of Growth Options in Explaining Stock Returns
Abstract
We extend the Fama-French (1992) model by considering growth option (as well as distress/leverage) variables in explaining the cross section of stock returns. We find that growth option variables, namely growth in capital investment and yet-unexercised growth options (GO), are significantly and negatively related to stock returns. Investors may be willing to accept lower average returns from growth stocks in exchange for a more favorable (positively skewed) risk-return profile. Book-to-market (BM) ratio seems to proxy for omitted distress/leverage variables. When these are explicitly accounted for, BM is not that significant. Our growth options variables have added explanatory power.
- DOI
- 10.1017/s0022109014000118
- Volume
- 49
- Issue
- 3
- Pages
- 749-771
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref