Growth options and firm valuation
- This paper studies the relation between firm value and a firm's growth options. We find strong empirical evidence that (average) Tobin's Q increases with firm-level volatility. However, the significance mainly comes from R&D firms, which have more growth options than non-R&D firms. By decomposing firm-level volatility into its systematic and unsystematic part, we also document that only idiosyncratic volatility (ivol) has a significant effect on valuation. Second, we analyze the relation of stock returns to realized contemporaneous idiosyncratic volatility and R&D expenses. Single sorting according to the size of idiosyncratic volatility, we only find a significant ivol anomaly for non-R&D portfolios, whereas in a four-factor model the portfolio alphas of R&D portfolios are all positive. Double sorting on idiosyncratic volatility and R&D expenses also reveals these differences between R&D and non-R&D firms. To simultaneously control for several explanatory variables, we also run panel regressions of portfolio alphas which confirm the relative importance of idiosyncratic volatility that is amplified by R&D expenses.
Author: | Holger KraftGND, Eduardo S. Schwartz, Farina Weiss |
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URN: | urn:nbn:de:hebis:30:3-293768 |
URL: | http://ssrn.com/abstract=2224014 |
DOI: | https://doi.org/10.2139/ssrn.2224014 |
Parent Title (German): | SAFE working paper series ; No. 6 |
Series (Serial Number): | SAFE working paper (6) |
Publisher: | Goethe-Univ., House of Finance, Sustainable Architecture for Finance in Europe, SAFE |
Place of publication: | Frankfurt am Main |
Document Type: | Working Paper |
Language: | English |
Year of Completion: | 2013 |
Year of first Publication: | 2013 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2013/04/18 |
Tag: | Firm valuation; R&D expenses; Real options; Volatility |
Issue: | Version: 5 Februar 2013 |
Page Number: | 38 |
HeBIS-PPN: | 337752370 |
Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF) | |
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Sammlungen: | Universitätspublikationen |
Licence (German): | Deutsches Urheberrecht |