Growth options as determinants of skewness

We add to the explanatory theory of skewness by showing how real options generate convexity of payoffs and skewness of returns. We show empirically that real growth options are significant, positive, and robust determinants of idiosyncratic skewness over and above previously reported determinants. Moreover, we provide evidence that the part of the expected idiosyncratic skewness that is generated by growth options has a negative return premium. These results suggest a behaviourally rational transmission mechanism from real growth options to stock returns through observable enhanced skewness and lottery type features.