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| Author: | Malmendier, U. Tate, G. |
| Title: | Who makes acquisitions? CEO overconfidence and the market's reaction |
| Journal: | Journal of Financial Economics
2008 : JUL, VOL. 89:1, p. 20-43 |
| Index terms: | executives management markets mergers |
| Freeterms: | acquisitions |
| Language: | eng |
| Abstract: | It is asked if CEO overconfidence (henceforth as: o-c.) helps to explain merger decisions. O-c. type CEOs over-estimate their ability to generate returns. As a result, they overpay for target companies, undertaking value-destroying mergers. In case they have access to internal financing, the effects are strongest. These predictions are tested using two proxies for o-c.: CEOs' personal over-investment in their company and their press portrayal. It is found that the odds of making an acquisition are 65 percent higher if the CEO is classified as o-c. The effect is largest if the merger is diversifying and does not require external financing. The market reaction at merger announcement is significantly more negative than for non-o-c. type CEOs. |
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