Real Options, Idiosyncratic Skewness, and Diversification

Luca Del Viva, Eero Kasanen, Lenos Trigeorgis

Research output: Contribution to journalArticleScientificpeer-review


We show how firm-level real options lead to idiosyncratic skewness in stock returns. We then document empirically that growth option variables are positive and significant determinants of idiosyncratic skewness. The real option impact on skewness is more significant in firms with lottery-type features, small size, high volatility, distressed, low return on assets, and low book-to-market ratio. We also find that expectation on idiosyncratic skewness is associated with lower Sharpe ratios. This suggests investors are willing to sacrifice mean-variance portfolio efficiency for greater skewness deriving from real options. Furthermore, financial flexibility has a positive incremental effect, enhancing the beneficial role of asset flexibility on idiosyncratic skewness.
Original languageEnglish
Pages (from-to)215-241
JournalJournal of Financial and Quantitative Analysis
Issue number1
Publication statusPublished - 2017
MoE publication typeA1 Journal article-refereed


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