Study On The Impacts Of Growth Options On Firm Valuation And Risk-return Characteristics:a Perspective On Firm Lifecycle

The total assets of a firm generally are composed by assets-in-place and growth options.By changing the relative composition of total assets in the evolution over firm lifecycle,not only the decreasing of the growth opportunities endowed to a firm,but also the exercising and creating of growth options would have an important impact on the dynamics of firm valuation as well as the risk-return characteristics.From the perspective on the dynamic of growth options over firm lifecycle,this dissertation employs the discounted cash flow model,the real option model and the stochastic discount factor approach and theoretically investigates how the exercising and creating of growth options affect a firm's market valuation and risk-return characteristics over its lifecycle.Based on a sample of A-share listed companies in Shanghai and Shenzhen stock exchanges,using capital expenditure intensity and R&D intensity as proxies for the exercising and the creating of growth options respectively,the dissertation employs Fama-MacBeth cross-section regression and portfolio time-series regression to investigate theoretical predictions.The contents and key conclusions are as follows:First,this dissertation develops a valuation model to demonstrate the roles of the gradually exercising of existing growth options and the creation of new growth option with a certain probability in determining the change of firm valuation over its lifecycle.The results predict that the gradually exercising of existing growth options would cause a downward trend of firm valuation over its lifecycle,while the downward trend will be mitigated by the creation of new growth options and the continually creating even lead to an upward trend of firm valuation.The empirical evidence supports our theoretical predictions well: the capital expenditure intensity will strengthen the negative relation between firm valuation and firm age,while R&D intensity will weaken this negative relation.Moreover,even controlling the effect of financial constraints,agency costs and other relative factors,we find a robust result on the positive relation between firm valuation and firm age for the firms with continuously engaged in R&D investment.Second,by deveploping a two-period valuation model,the dissertation theoretically discusses the effect of the heterogeneous beliefs about the average profitability of underlying asset of growth options on firm valuation,and conduct empirical tests from the perspective of firm lifecycle,the exercising and creation of growth options.The results indicate that heterogeneous beliefs have a positive effect on firm valuation by increasing the value of growth option,and the positive effect is more pronounced for younger firms and firms with more growth options.In addition,the exercising(creation)of growth options will not only decrease(increase)heterogeneous beliefs,but also will weaken(strengthen)the positive relation between heterogeneous beliefs and firm valuation.Third,using CAPM as a benchmark,the dissertation firstly demonstrates that CAPM become to valid again if the nonlinear impact of real options on expected stock returns as well as individual stock betas are eliminated.Using capital expenditure intensity and R&D intensity to capture the exercising and creating of growth option,the additional evidence shows that the CAPM pricing bias(alpha)will be reduced once the influences of capital expenditure intensity and R&D intensity are removed from the expected stock returns and individual stock betas.Specifically,the regression coefficient of individual stock beta turns to be significantly positive,which implies that CAPM is valid after adjusing the influences of growth options,and the adjustment effect is more obvious for the firms in the early stages of their lifecycle.Fourth,using the Fama-French three factor model as a benchmark,the dissertation develops an asset pricing model to demonstrate how the gradually exercising of existing growth options and the creating of growth options simultaneously determine the dynamics of the pricing powers of size factor and value factor over firm lifecycle,and then tests theoretical predictions.Both theoretical and empirical results show that the grandully exercising of growth options will reduce the pricing power of size factor as a firm grows into maturity,while the creation of growth options can mitigate the downward trend of the pricing power of size factor.However,the pricing power of book-to-market factor does not obviously change as a firm becomes mature.Finally,for the phenomenon of profitability premium and the profitability factor of the Fama-French five-factor model,the dissertation links the difference in growth options with the differenc in profitability to provide a possible theoretical explanation and empirical evidence.The results from the time-series return on portfolios double-sorted by product market competition and profitability show that,the profitability premium is more pronounced for the firms in industries with strong competition,which is related to the fact that firms with higher(lower)profitability usually owns more(less)growth options.The results of Fama-MacBeth cross-sectional regression consistently show that product market competition can strengthen the positive relation between firms' profitability and expected stock returns,and the strengthen effect appears only for the firms with more growth options and the firms going on the early stage of their lifecycle.