We develop a firm valuation model with growth options and downward jump risk as a proxy for distress to capture the cross-sectional variation of stock returns associated with high distress, size and book-to-market. A greater jump risk reduces the ratio of fixed assets to firm value due to a greater option value (Merton (1976)) and simultaneously decreases the sensitivity of firm value to systematic risk. We propose a novel mechanism that simultaneously generates the low equity returns of small firms with low book-to-market ratio (small growth anomaly), and the low equity returns of high distress firms (distress anomaly) shown to exist separately in the literature. The model further predicts that the stocks of high distress firms capture the risk of small growth firms; and that this relation strengthens in the firms’ reliance on growth options. Empirical results support these predictions.
Keywords: Distress, size, book-to-market, small, growth, glamor, stocks, failure risk, default risk, anomalies, cross section of stock returns, asset pricing, real options, growth options, mixed jump-diffusion process.
자료실
자료실
[2014년 제 4차] Small Growth and Distress Anomalies: Two Sides of t
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2014-12-12