Conglomerate investment, skewness, and the CEO long shot bias

C.A.R. Schneider, Oliver Spalt

Research output: Contribution to journal › Article › Scientific › peer-review

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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 languageEnglish
Pages (from-to)635-672
JournalJournal of Finance
Volume71
Issue number2
DOIs
Publication statusPublished - 2016

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Conglomerate
Skewness
Chief executive officer
Corporate investment
Shareholder wealth
Geographical variation
Capital allocation
Investment decision
Behavioral biases
Capital expenditures
Discount
Overinvestment
Gambling

Keywords

  • Behavioral Corporate Finance
  • Skewness
  • Investment

Cite this

Schneider, C.A.R. ; Spalt, Oliver. / Conglomerate investment, skewness, and the CEO long shot bias. In: Journal of Finance. 2016 ; Vol. 71, No. 2. pp. 635-672.
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Schneider, CAR & Spalt, O 2016, 'Conglomerate investment, skewness, and the CEO long shot bias', Journal of Finance, vol. 71, no. 2, pp. 635-672. https://doi.org/10.1111/jofi.12379

Conglomerate investment, skewness, and the CEO long shot bias. / Schneider, C.A.R.; Spalt, Oliver.

In: Journal of Finance, Vol. 71, No. 2, 2016, p. 635-672.

Research output: Contribution to journal › Article › Scientific › peer-review

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Schneider CAR, Spalt O. Conglomerate investment, skewness, and the CEO long shot bias. Journal of Finance. 2016;71(2):635-672. https://doi.org/10.1111/jofi.12379

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