Conglomerate Investment, Skewness, and the CEO Long Shot Bias
Abstract
Do behavioral biases of executives matter for corporate investment decisions? Using segment-level capital allocation in multisegment firms (“conglomerates”) as a laboratory, we show that capital expenditure is increasing in the expected skewness of segment returns. Conglomerates invest more in high-skewness segments than matched stand-alone firms, and trade at a discount, which indicates overinvestment that is detrimental to shareholder wealth. Using geographical variation in gambling norms, we find that the skewness-investment relation is particularly pronounced when CEOs are likely to find long shots attractive. Our findings suggest that CEOs allocate capital with a long-shot bias.
Keywords
Behavioral Corporate Finance; Skewness; Investment
Cite as
Schneider, C., & Spalt, O. (2016). Conglomerate Investment, Skewness, and the CEO Long Shot Bias. Journal of Finance, 71(2), 635–672.Details
Publication type
Research article (journal)
Peer reviewed
Yes
Publication status
Published
Year
2016
Journal
Journal of Finance
Volume
71
Issue
2
Start page
635
End page
672
Language
English
ISSN
0022-1082
DOI
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