Who makes acquisitions? CEO overconfidence and the market's reaction
Does CEO overconfidence help to explain merger decisions? Overconfident CEOs over-estimate their ability to generate returns. As a result, they overpay for target companies and undertake value-destroying mergers. The effects are strongest if they have access to internal financing. We test these predictions using two proxies for overconfidence: CEOs' personal over-investment in their company and their press portrayal. We find that the odds of making an acquisition are 65% higher if the CEO is classified as overconfident. The effect is largest if the merger is diversifying and does not require external financing. The market reaction at merger announcement (-90 basis points) is significantly more negative than for non-overconfident CEOs (-12 basis points). We consider alternative interpretations including inside information, signaling, and risk tolerance.
Year of publication: |
2008
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Authors: | Malmendier, Ulrike ; Tate, Geoffrey |
Published in: |
Journal of Financial Economics. - Elsevier, ISSN 0304-405X. - Vol. 89.2008, 1, p. 20-43
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Publisher: |
Elsevier |
Saved in:
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