Which value component has a larger effect on idiosyncratic volatility, assets in place or growth options?

Yu Hu and Xiaoquan Jiang

Applied Economics, 2024, vol. 56, issue 46, 5530-5554

Abstract: Applying accounting identity in valuation models, we empirically examine how a firm’s idiosyncratic volatility depends on its relative value of assets in place and growth options. We find that for a typical firm, idiosyncratic volatility is as sensitive to the relative value of assets in place as to growth options. However, for firms dominated by assets in place (growth options), idiosyncratic volatility is more sensitive to the relative value of assets in place (growth options). Binding irreversibility constraint (uncertainty) makes the effect of assets in place (growth options) more pronounced.

Date: 2024
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DOI: 10.1080/00036846.2023.2257037

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