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.
| Original language | English |
|---|---|
| Pages (from-to) | 749-771 |
| Number of pages | 23 |
| Journal | JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS |
| Volume | 49 |
| Issue number | 3 |
| Early online date | 26 Feb 2014 |
| DOIs | |
| Publication status | Published - Jun 2014 |