Capital cycles – the herding behavior of CEOs in similar business activities – can exert a strong impact on investor returns. When all CEOs see the same opportunity, but ignore the behavior of their peers, too much capital can end up chasing the same, crowded opportunity; expectations of high returns are dashed, capital becomes trapped in low return projects, investor outcomes are poor.
Long periods of poor returns eventually erode investor trust, starving CEOs of opportunity. Some businesses fail, others are merged, and the surviving CEOs can turn uncharacteristically conservative, nervous about repeating past mistakes. As capital leaves, poor returns on legacy projects improve and carefully chosen new projects are often surprisingly lucrative.
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Capital Cycles in the Oil & Gas Sector
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