Building on the investment-based asset pricing framework, we show that firms’ ability to timely scale down their operations reduces the sensitivity of their equity value to large adverse productivity shocks. Using U.S. data in the times of the COVID-19 pandemic, we provide empirical evidence...

Operating flexibility enables firms to promptly curtail further losses during bad times and thereby reduces their stock prices’ crash risk. We formalize this insight through studying a real-options asset-pricing model. Consistent with the loss-curtailment mechanism, our theoretical analyses...

We study a novel mechanism through which real options play a prominent role in inducing the skewness of stock returns. Building on the investment-based asset pricing framework, we show that firms’ real options to contract (expand) their businesses when productivity is low (high) can increase...