Abstract
Do behavioral biases of executives matter for corporate investment decisions? Using segment-level capital allocation in multi-segment 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 standalone 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.
Original language | English |
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Pages (from-to) | 635-672 |
Journal | Journal of Finance |
Volume | 71 |
Issue number | 2 |
DOIs | |
Publication status | Published - 2016 |
Keywords
- Behavioral Corporate Finance
- Skewness
- Investment