Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/88712
Authors: 
Kraft, Holger
Schwartz, Eduardo
Weiss, Farina
Year of Publication: 
2013
Series/Report no.: 
SAFE Working Paper Series 6
Abstract: 
This paper studies the relation between firm value and a firm's growth options. We find strong empirical evidence that (average) Tobin's Q increases with firm-level volatility. However, 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 also document that only idiosyncratic volatility (ivol) has a significant effect on valuation. Second, we analyze the relation of stock returns to realized contemporaneous idiosyncratic volatility and R&D expenses. Single sorting according to the size of idiosyncratic volatility, we only find a significant ivol anomaly for non-R&D portfolios, whereas in a four-factor model the portfolio alphas of R&D portfolios are all positive. Double sorting on idiosyncratic volatility and R&D expenses also reveals these differences between R&D and non-R&D firms. To simultane-ously control for several explanatory variables, we also run panel regressions of portfolio alphas which confirm the relative importance of idiosyncratic volatility that is amplified by R&D expenses.
Subjects: 
Firm valuation
Real options
Volatility
R&D expenses
JEL: 
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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