Managerial overconfidence and corporate takeovers

Hongbo Pan, Xinping Xia and Minggui Yu

International Journal of Managerial Finance, 2006, vol. 2, issue 4, 328-342

Abstract: Purpose - The purpose of this paper is to model the announcement returns of merging firms based on managerial overconfidence about merger synergy. Design/methodology/approach - The paper applies continuous‐time real options techniques and game theoretic concepts. Managerial overconfidence and strategic interaction between the bidder and the target are incorporated into the model. Findings - This model implies that: abnormal returns to bidding shareholders will be negative with a high degree of managerial overconfidence; combined returns to shareholders are usually positive; and both the bidder's and the target's abnormal returns are related to industry characteristics, the degree of managerial overconfidence, and the way merger synergies are divided. Originality/value - This paper, for the first time, reconciles theoretically the following stylized facts: combined returns to shareholders are usually positive; and returns to the acquirer are, on average, not positive. In addition, the model generates new predictions relating these returns to industry characteristics and the degree of managerial overconfidence.

Keywords: Take‐overs; Acquisitions and mergers; Returns; Managers (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:17439130610705517

DOI: 10.1108/17439130610705517

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