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Growth options and firm valuation

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  • Holger Kraft
  • Eduardo Schwartz
  • Farina Weiss

Abstract

This paper studies the relationship between firm value and a firm's growth options. We find strong empirical evidence that Tobin's Q increases with firm†level volatility. 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 document that only idiosyncratic volatility has a significant effect on valuation. Second, we analyze the relation of stock returns to realized contemporaneous idiosyncratic volatility and R&D expenses. Sorting on idiosyncratic volatility yields a significant negative relationship between portfolio alphas and contemporaneous idiosyncratic volatility for non†R&D portfolios.

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  • Holger Kraft & Eduardo Schwartz & Farina Weiss, 2018. "Growth options and firm valuation," European Financial Management, European Financial Management Association, vol. 24(2), pages 209-238, March.
    • Handle: RePEc:bla:eufman:v:24:y:2018:i:2:p:209-238
    DOI: 10.1111/eufm.12141
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    18. de la Horra, Luis P. & Perote, Javier & de la Fuente, Gabriel, 2022. "The impact of economic policy uncertainty and monetary policy on R&D investment: An option pricing approach," Economics Letters, Elsevier, vol. 214(C).

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