{"title":"In Too Deep: The Effect of Sunk Costs on Corporate Investment","authors":"MARIUS GUENZEL","doi":"10.1111/jofi.13430","DOIUrl":null,"url":null,"abstract":"Sunk costs are unrecoverable costs that should not affect decision making. I provide evidence that firms systematically fail to ignore sunk costs and that this leads to significant investment distortions. In fixed-exchange-ratio stock mergers, aggregate market fluctuations after parties enter into a binding merger agreement induce plausibly exogenous variation in the final acquisition cost. These quasi-random cost shocks strongly predict firms' commitment to an acquired business following deal completion, with an interquartile cost increase reducing subsequent divestiture rates by 8% to 9%. Consistent with an intrapersonal sunk cost channel, distortions are concentrated in firm-years in which the acquiring CEO is still in office.","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":"58 1","pages":""},"PeriodicalIF":7.6000,"publicationDate":"2025-03-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Finance","FirstCategoryId":"96","ListUrlMain":"https://doi.org/10.1111/jofi.13430","RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
Sunk costs are unrecoverable costs that should not affect decision making. I provide evidence that firms systematically fail to ignore sunk costs and that this leads to significant investment distortions. In fixed-exchange-ratio stock mergers, aggregate market fluctuations after parties enter into a binding merger agreement induce plausibly exogenous variation in the final acquisition cost. These quasi-random cost shocks strongly predict firms' commitment to an acquired business following deal completion, with an interquartile cost increase reducing subsequent divestiture rates by 8% to 9%. Consistent with an intrapersonal sunk cost channel, distortions are concentrated in firm-years in which the acquiring CEO is still in office.
期刊介绍:
The Journal of Finance is a renowned publication that disseminates cutting-edge research across all major fields of financial inquiry. Widely regarded as the most cited academic journal in finance, each issue reaches over 8,000 academics, finance professionals, libraries, government entities, and financial institutions worldwide. Published bi-monthly, the journal serves as the official publication of The American Finance Association, the premier academic organization dedicated to advancing knowledge and understanding in financial economics. Join us in exploring the forefront of financial research and scholarship.