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Conglomerate Investment, Skewness, and the CEO Long‐Shot Bias
Author(s) -
SCHNEIDER CHRISTOPH,
SPALT OLIVER
Publication year - 2016
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12379
Subject(s) - skewness , investment (military) , shareholder , economics , capital (architecture) , investment decisions , monetary economics , business , econometrics , financial economics , corporate governance , microeconomics , behavioral economics , finance , geography , archaeology , law , politics , political science
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.