59 Pages Posted: 2 Sep 2011 Last revised: 20 Jul 2017
Date Written: June 30, 2015
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.
Keywords: Behavioral Corporate Finance, Skewness, Investment
JEL Classification: G11, G31, G34
Suggested Citation: Suggested Citation
Schneider, Christoph and Spalt, Oliver G., Conglomerate Investment, Skewness, and the CEO Long Shot Bias (June 30, 2015). Journal of Finance, Vol. 71, Issue 2, pp. 635-672, 2016. Available at SSRN: https://ssrn.com/abstract=1920836 or http://dx.doi.org/10.2139/ssrn.1920836