The role of procedural rationality in debiasing acquisition decisions of overconfident CEOs

Stevo Pavićević and Thomas Keil

Strategic Management Journal, 2021, vol. 42, issue 9, 1696-1715

Abstract: Research Summary In corporate acquisitions, overconfident chief executive officers (CEOs) often make biased decisions, subsequently paying unjustifiably high acquisition premiums. We investigate the predeal process in which the acquisition premium is decided upon and, drawing from procedural rationality theory, argue that the pursuit of greater procedural rationality through slow‐paced predeal processes reduces the tendency of overconfident CEOs to inflate acquisition premiums. The empirical results based on a sample of acquisitions involving publicly held US firms show that overconfident CEOs tend to pay high acquisition premiums, replicating earlier findings of such a relationship. More importantly, the results show that the tendency of overconfident CEOs to overpay for acquisitions decreases under conditions in which the predeal processes are slower in pace. Managerial Summary CEOs often exhibit excessively high levels of confidence in their ability to make successful corporate acquisitions. Driven by the belief in their ability, overconfident CEOs often end up overpaying for acquisitions. Our study provides suggestive evidence that setting a slow acquisition process pace is an important prerequisite for an acquiring firm and its board of directors to attenuate the inflating effect of CEO overconfidence on acquisition premiums. Our arguments and results imply that boards of directors should slow the pace of predeal acquisition processes if their CEO is exhibiting signs of overconfidence.

Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://doi.org/10.1002/smj.3319

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:stratm:v:42:y:2021:i:9:p:1696-1715

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0143-2095

Access Statistics for this article

More articles in Strategic Management Journal from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().