The impact of growth options on systematic risk: The case of European firms

ABSTRACT: This paper focuses on an analysis of the relation between systematic risk and growth opportunities from the real options perspective. Assuming the risk of current and future businesses to be independent from ownership (i.e. from whichever firm invests in them), we deduce that the systematic risk of a firm’s equity depends on the weight of growth options on its market value. We test this hypothesis by analysing a sample of 958 European firms over the period 2001-2005. Our findings bear out the impact of growth options on systematic risk and are robust to different splits of the sample into risk groups, thus providing new insights to interpret the findings to emerge from multifactor market models.