Managerial Skewness Preference and the Allocation of Corporate Resources in Internal Capital Markets

Christoph Schneider, Oliver G. Spalt
2012 Social Science Research Network  
This article examines the relationship between skewness and capital allocation in conglomerate firms. Using Compustat segments data we document that small segments in industries with high expected skewness have higher capital spending as a fraction of segment assets than other segments in the conglomerate or comparable stand-alone firms. We show that this pattern is not easily explained by standard versions of either the "bright-side"-view or the "dark-side"-view of internal capital markets.
more » ... ng geographical variation in religiously-induced skewness preference, we show that our results are most pronounced when managerial skewness preference is likely to be high. Our new findings suggest an important role of CEO preferences for capital allocations and shed light on several major issues in the internal capital markets literature including optimal CEO compensation and the diversification discount. JEL Classification: G31, G39 , 2010, The idiosyncratic volatility puzzle: Time trend or speculative episodes?, Review of Financial Studies 23, 863-899. Brav, Alon, and Paul A. Gompers, 1997, Myth or reality? the long-run underperformance of initial public offerings: Evidence from venture and nonventure capital-backed companies,
doi:10.2139/ssrn.1992151 fatcat:cdmfcgx5tfep5ggk27rj3bsv4u