Conglomerate investment, skewness, and the CEO long shot bias

C.A.R. Schneider, Oliver Spalt

Research output: Contribution to journalArticleScientificpeer-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

Fingerprint

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

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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 journalArticleScientificpeer-review

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