TY - JOUR
T1 - Real Options, Idiosyncratic Skewness, and Diversification
AU - Del Viva, Luca
AU - Kasanen, Eero
AU - Trigeorgis, Lenos
PY - 2017/2/1
Y1 - 2017/2/1
N2 - We show how firm-level real options lead to idiosyncratic skewness in stock returns. We then document empirically that growth option variables are positive and significant determinants of idiosyncratic skewness. The real option impact on skewness is more significant in firms with lottery-type features, small size, high volatility, distressed, low return on assets, and low book-to-market ratio. We also find that expectation on idiosyncratic skewness is associated with lower Sharpe ratios. This suggests investors are willing to sacrifice mean-variance portfolio efficiency for greater skewness deriving from real options. Furthermore, financial flexibility has a positive incremental effect, enhancing the beneficial role of asset flexibility on idiosyncratic skewness.
AB - We show how firm-level real options lead to idiosyncratic skewness in stock returns. We then document empirically that growth option variables are positive and significant determinants of idiosyncratic skewness. The real option impact on skewness is more significant in firms with lottery-type features, small size, high volatility, distressed, low return on assets, and low book-to-market ratio. We also find that expectation on idiosyncratic skewness is associated with lower Sharpe ratios. This suggests investors are willing to sacrifice mean-variance portfolio efficiency for greater skewness deriving from real options. Furthermore, financial flexibility has a positive incremental effect, enhancing the beneficial role of asset flexibility on idiosyncratic skewness.
UR - http://www.scopus.com/inward/record.url?scp=85011876536&partnerID=8YFLogxK
U2 - 10.1017/S0022109016000703
DO - 10.1017/S0022109016000703
M3 - Review article
AN - SCOPUS:85011876536
SN - 0022-1090
VL - 52
SP - 215
EP - 241
JO - JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS
JF - JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS
IS - 1
ER -