Who makes acquisitions CEO overconfidence and the markets reaction (original) (raw)
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Do Firms’ Leverage Deviations Affect Overconfident Ceos’ Acquisition Decisions?
Corporate Ownership and Control
In this paper, we examine how an overconfident manager makes an acquisition decision based on whether or not her/his firm is excessively deviated from the target capital structure. In specially, we find that when her firm is overleveraged, overconfident CEO’s are likely to merge relatively smaller firms. Conditional on making acquisitions, overconfident CEOs are less likely to use stock to finance the acquisition, contrary to previous capital structure literature. Furthermore, when her firm is overleveraged, the overconfident CEO is likely to make value enhancing acquisition, since the market reaction, the average 3-day as well as 5-day cumulative abnormal return of the deal announcement, is significantly positive. Overall, our study improves the understanding of the interdependence between capital structure and investment decisions in the present of a managerial behavioural bias. And our study also shows that over-leverage may mitigate the unfavorable effects of managerial overconf...
CEO Overconfidence and International Merger and Acquisition Activity
Journal of Financial and Quantitative Analysis, 2013
This study examines the role that CEO overconfidence plays in an explanation of international mergers and acquisitions during the period 2000-2006. Using a sample of CEOs of Fortune Global 500 firms over our sample period, we find that CEO overconfidence is related to a number of critical aspects of international merger activity. Overconfidence helps to explain the number of offers made by a CEO, the frequency of diversifying acquisitions, and the use of cash to finance a merger deal. Although overconfidence is an international phenomenon, it is most extensively observed in individuals heading firms headquartered in Christian countries that encourage individualism while deemphasizing long-term orientation in their national cultures.
CEO Overconfidence and International Merger and Acquistion Activity
Social Science Research Network, 2010
This study examines the role that CEO overconfidence plays in an explanation of international mergers and acquisitions during the period 2000-2006. Using a sample of CEOs of Fortune Global 500 firms over our sample period, we document a number of demographic and national patterns in the global distribution of overconfident CEOs. We find that the Hofstede measures of national culture partially explain these geographical patterns in the dispersion of overconfident CEOs. We conclude that CEO overconfidence is an international phenomenon, although it is most extensively observed in younger individuals heading firms headquartered in Christian countries that encourage individualism while deemphasizing a long-term orientation in their national cultures. We also find that overconfidence is related to a number of aspects of merger activity. CEO overconfidence helps to explain the number of offers made by a CEO, the frequency of diversifying acquisitions, and the use of cash to finance a merger deal.
Uncertainty Triggers Overreaction: Evidence from Corporate Takeovers
Behavioural finance models suggest that under uncertainty, investors overweight their private information and overreact to public signals. We test this prediction in a M&A’s framework. We find that under high information uncertainty, when investors are more likely to possess firm-specific information, they generate highly positive and significant gains following the announcement of private stock, public cash and private cash acquisitions (positive news) while the market heavily punishes public stock (negative news) deals. On the other hand, under conditions of low information uncertainty when investors do not possess private information, the market reaction is complete (i.e. zero abnormal returns) irrespective of the type of acquisition.
It Takes Two to Tango: Overpayment and Value Destruction in M&A Deals
This study adds to the literature demonstrating the adverse market reaction to acquisitions by overconfident CEOs (e.g., . In particular, it explores the parallel role played by overconfident target firm CEOs in explaining the premium paid, and value destruction in such deals, and, most importantly, the "perfect storm" of the interaction between the two overconfident parties. Our results indicate that overconfident CEOs tend to pay a higher premium in acquisitions than their non-overconfident counterparts. However, the premium paid when both acquiring firm and target firm CEOs are overconfident is between 7% to 9% higher than if neither, or only one, side of the deal manifests such behavioral bias. We also show how the adverse market reaction to deals by overconfident acquirers is augmented when target firm CEOs are similarly prone to this judgmental bias.
2011
While there is much evidence on corporate boards mitigating agency problems, there is little on whether boards help managers make better decisions. We provide evidence that strong and independent boards help overconfident CEOs avoid honest mistakes when they seek to acquire other companies. In addition, we find that once-overconfident CEOs make better acquisition decisions after they experience personal stock trading losses, providing evidence that a manager's recent personal experience, and not just educational and early career experience, influences firm investment policy. Finally, we develop and validate a new CEO overconfidence measure that is easily constructed from machinereadable insider trading data, unlike previously-used measures.
Overconfidence, CEO Selection, and Corporate Governance
The Journal of Finance, 2008
We examine the interaction between corporate governance at two levels: internal organizational governance that is intended to distinguish among managers of a priori unknown abilities to determine who becomes CEO, and corporate governance at the board level that seeks to retain or fire the CEO based on observed performance. An overconfident manager has a higher probability than a rational manager of being promoted to CEO under valuemaximizing internal governance. Moreover, the overconfidence of a risk-averse CEO enhances firm value up to a point, but the effect is non-monotonic and differs from that of lower risk aversion. Overconfident CEOs also underinvest in information production. Corporate governance at the board level depends on the interaction between perceptions of CEO ability and overconfidence. The board fires both excessively diffident and excessively overconfident CEOs. Finally, the Sarbanes-Oxley Act is predicted to improve the precision of information provided to investors, but reduce aggregate investment and possibly firm values.
Board overconfidence and M&A performance: evidence from the UK
Review of Quantitative Finance and Accounting
This paper investigates the relationship between board overconfidence and mergers and acquisitions (M&A) performance based on 754 M&A deals in the UK from 2002 to 2018. Employing three proxies to measure overconfidence, namely, fraction of male directors on the board, multiple acquisitions and merger characteristics, our results suggest that a higher fraction of male directors on the board and multiple acquisitions lead to poor M&A performance. The results also show that multiple acquirers’ deals generate higher returns than subsequent deals and this is due to self-attribution bias. In terms of merger characteristics, this study has found that, when overconfident acquirers use cash as the method of payment or when they embark on diversifying M&A, it leads to poor M&A performance. The results are robust across both univariate and multivariate analyses and also across alternate measures of post-merger performance. The findings of this study have important policy implication with regar...