Conglomerate Investment, Skewness, and the CEO Long-Shot Bias

Abstract

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.