Does CEO overconfidence help to explain merger decisions? Overconfident CEOs overestimate 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 overinvestment 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.

Research in behavioral corporate finance takes two distinct approaches. The first emphasizes that investors are less than fully rational. It views managerial financing and investment decisions as rational responses to securities market mispricing. The second approach emphasizes that managers are less than fully rational. It studies the effect of nonstandard preferences and judgmental biases on managerial decisions. This survey reviews the theory, empirical challenges, and current evidence pertaining to each approach. Overall, the behavioral approaches help to explain a number of important financing and investment patterns. The survey closes with a list of open questions.

Acquiring-firm shareholders lost 12 cents at the announcement of acquisitions for every dollar spent on acquisitions for a total loss of $240 billion from 1998 through 2001, whereas they lost $7 billion in all of the 1980s, or 1.6 cents per dollar spent. Though the announcement losses to acquiring-firm shareholders in the 1980s are more than offset by gains to acquired-firm shareholders, the losses of bidders exceed the gains of targets from 1998 through 2001 by $134 billion. The 1998-2001 aggregate dollar loss of acquiring-firm shareholders is so large because of a small number of acquisition announcements by firms with extremely high valuations. Without these announcements, the wealth of acquiring-firm shareholders would have increased. The large losses are consistent with the existence of negative synergies from the acquisitions, but the size of the losses in relation to the consideration paid for the acquisitions is large enough that part of the losses most likely results from investors reassessing the standalone value of the bidders. Firms that announce acquisitions with large dollar losses perform poorly afterwards.

I provide a synthesis of the Behavioural finance literature over the past two decades. I review the literature in three parts, namely, (i) empirical and theoretical analyses of patterns in the cross-section of average stock returns, (ii) studies on trading activity, and (iii) research in corporate finance. Behavioural finance is an exciting new field because it presents a number of normative implications for both individual investors and CEOs. The papers reviewed here allow us to learn more about these specific implications.

This paper documents a dramatic difference in the abnormal announcement period returns of the first bidder to announce an acquisition attempt in a particular industry. Typical of the literature, the set of all bidders in our sample earn abnormal returns indistinguishable from zero. However, bidders announcing an acquisition after a ‘dormant period ’ of at least a year without such activity in their industry, earn significantly positive abnormal returns of 0.8%. This contrasts with the insignificantly negative returns earned by bidders with shorter industry dormant periods. We also document that the prices of subsequent bidders adjust proportionately to returns of the initial bidder at the time of that initial announcement. In addition, bidder abnormal returns are significantly positively related to the length of the dormant period. These results provide strong evidence in support of the anticipation hypothesis. Our results hold after controlling for variables typically associated with bidding firm returns. 2 Anticipation Acquisitions and the Bidder Return Puzzle

I provide a synthesis of the behavioral finance literature over the past two decades. I review the literature in three parts, namely, (i) empirical and theoretical analyses of patterns in the cross-section of average stock returns, (ii) studies on trading activity, and (iii) research in corporate finance. Behavioral finance is an exciting new field because it presents a number of normative implications for both individual investors and CEOs. The papers reviewed here allow us to learn more about these specific implications.

We find that equity mispricing impacts the speed at which firms adjust to their target leverage and does so in predictable ways depending on whether the firm is over- or underlevered. For example, firms that are above their target leverage and should therefore issue equity (or retire debt), adjust more rapidly to their target when their equity is overvalued. However, when a firm is undervalued, but needs to reduce leverage, the speed of adjustment is much slower. Our findings support the role of equity mispricing as an important factor that alters the cost of making adjustments within the dynamic trade-off theory.

University for their invaluable comments and suggestions. All errors are my own. Between 1990 and 2005, 14 percent of the world’s public firms were targets in a minority block acquisition, of which one third are cross-border in nature. These firms are mostly financially constrained with high growth opportunities and experience significant increases in their stock prices at the announcement. Financially constrained targets that have joint ventures or alliances with the corporate acquirers experience largest increases in their stock price. In the immediate two years following the acquisition, 27 percent of target firms issue new equity and the increase in the amount of net equity issuances is large. These findings are consistent with the conclusion that equity stake purchases by other corporations are useful in alleviating asymmetric information faced by target firms in raising external capital. There is little evidence that corporate blockowners lower contracting costs in the product market, effectively monitor insiders or capitalize on their overvalued stocks. 2 Between 1990 and 2005, 14 percent of public firms around the world were targets in a minority block acquisition, with the fraction of acquired equity averaging 16 percent. 1 There is also large cross-country variation in corporate block acquisition activities. Thirty-three percent of public

We examine the characteristics of the sixth merger wave that started in 2003 and came to an end approximately in late-2007. The drivers of this wave lie primarily in the availability of abundant liquidity, in line with neoclassical explanations of merger waves. Acquirers were less overvalued relative to targets and merger proposals comprised higher cash elements. Moreover, the market for corporate control was less competitive, acquirers were less acquisitive, managers displayed less over-optimism and offers involved significantly lower premiums, indicating more cautious and rational acquisition decisions. Strikingly however, deals destroyed at least as much value for acquiring shareholders as in the 1990s.

In this paper I develop a dynamic structural model in which a firm makes rational decisions to buy or sell assets in the presence of idiosyncratic and aggregate productivity shocks. By identifying equilibrium asset prices, the model produces an industry with a well-defined panel of firms and jointly analyzes firms ’ investment decisions and the aggregate activity of asset sales over the business cycle. It suggests that changes of productivity, rather than levels, affect firms ’ decisions- firms with rising productivity buy assets and firms with falling productivity choose to downsize (rising buys falling). On the aggregate level, industries with less persistent and highly dispersed productivity shocks experience more changes in productivity and therefore have greater asset sales. I calibrate my model by matching the simulated moments with empirical moments using plantlevel data from Longitudinal Research Database (LRD). Using the simulated panel, I show that most of the empirical evidence on asset sales is consistent with value-maximizing behavior: (1) firms which buy assets have higher valuation around the transaction, but lower long-run average — a result that was previously used to support the market-timing theory; and (2) small acquirers have higher returns during the acquisition year than do large acquirers.