Who makes acquisitions? CEO overconfidence and the market's reaction
Ulrike Malmendier () and
Journal of Financial Economics, 2008, vol. 89, issue 1, 20-43
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.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (381) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: Who Makes Acquisitions? CEO Overconfidence and the Market's Reaction (2004)
Working Paper: Who Makes Acquisitions? CEO Overconfidence and the Market's Reaction (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:89:y:2008:i:1:p:20-43
Access Statistics for this article
Journal of Financial Economics is currently edited by G. William Schwert
More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().