Volatility Risks and Growth Options

نویسندگان

Hengjie Ai

Dana Kiku

چکیده

We propose to measure growth opportunities by firms’ exposure to idiosyncratic volatility news. Theoretically, we show that the value of a growth option increases in idiosyncratic volatility but its response to volatility of aggregate shocks can be either positive or negative depending on option moneyness. Empirically, we show that price sensitivity to variation in idiosyncratic volatility carries significant information about firms’ future investment and growth even after controlling for conventional proxies of growth options such as book-to-market and other relevant firm characteristics. Consistent with our theoretical arguments, we also find that firm’ exposure to aggregate volatility, while priced, does not help predict their future growth. Option-intensive firms identified using our idiosyncratic volatility-based measure earn a lower premium than do firms that rely more heavily on assets in place. ∗Ai ([email protected]) is affiliated with the Carlson School of Management, University of Minnesota; Kiku ([email protected]) is at the University of Illinois at Urbana-Champaign. We would like to thank Ravi Bansal, Andres Donangelo, Laurent Fresard, Pete Kyle, Howard Kung, Bradley Paye, Yajun Wang and seminar participants at Duke University, Temple University, University of Texas at Dallas, University of Maryland, University of Illinois at Urbana-Champaign, University of Utah, University of Houston, INSEAD, the 2013 SFS Finance Cavalcade, the 2014 ASU Sonoran Winter Finance Conference, the 2014 Finance Down Under Conference, and the 2014 Western Finance Association meetings for their helpful comments. We would also like to thank Jerome Detemple (department editor), an associate editor and a referee for their insightful comments. The usual disclaimer applies.

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