Growth options, option exercise and firms' systematic risk

摘要

We develop and empirically test a theoretical model which analyzes the impact of growth options, profitability, and operating and financial leverage on equity's systematic risk. Conditioning on the relative magnitude of advertising expenditure to research and development (R&D) expenditure, we find that higher beta is associated with higher return volatility, lower book to market ratio, lower return on assets, higher operating and financial leverage, and larger market capitalization (Size). Conditioning on R&D intensity, we show that an increase in the moneyness of firm options, or the exercise of firm options (approximated by increases in capital expenditure, advertising expenditure or profitability) result in more significant decreases in beta. Dynamically estimated high-frequency betas appear to perform well in capturing variation in firm systematic risk associated with growth option factors.