Who makes acquisitions? CEO overconfidence and the market’s reaction (2007)
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@MISC{Malmendier07whomakes,
author = {Ulrike Malmendier and Geoffrey Tate},
title = {Who makes acquisitions? CEO overconfidence and the market’s reaction},
year = {2007}
}
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Abstract
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.
