Mergers, CEO Hubris, and Cost Stickiness

Daecheon Yang

Emerging Markets Finance and Trade, 2015, vol. 51, issue S5, S46-S63

Abstract: Hubris theory documents that bidder CEOs are overconfident about deal synergies without fearing the winner’s curse. We examine the role of bidder CEOs’ hubris over merger synergies on cost stickiness in the rapidly growing Korean market. Bidder CEOs who overestimate the merged firm’s growth retain more underutilized-capacity when sales decrease than do CEOs of stand-alone firms. Optimistic bidder CEOs induce greater cost stickiness through strong and irrational self-beliefs than do optimistic nonbidder CEOs. Given the learning and self-attribution effect, optimistic bidder CEOs who experience more successful operating synergies induce stickier costs than less successful CEOs with simply optimistic views. Implications for possible overslack and cost locking from bidder CEOs’ hubris are also discussed.

Date: 2015
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DOI: 10.1080/1540496X.2015.1062313

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