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

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

Journal of Financial and Quantitative Analysis, 2020, vol. 55, issue 7, 2150-2180

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.

Date: 2020
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