Online from: 1988
|Title:||Who makes acquisitions? CEO overconfidence and the market's reaction|
|Author(s):||Malmendier U, Tate G|
|Journal:||Journal of Financial Economics, Jul 2008, Volume: 89 Issue: 1 pp.20-44 (25 pages)|
|Keywords:||Chief Executives, Confidence, Executive Stock Options, Incentives, Mergers And Acquisitions, Share Prices, Usa|
|Article type:||Research paper|
|Reference:||37AU110 (Permanent URL)|
Design/methodology/approach - Tests a sample of 394 large US firms from 1980 to 1994. Surveys personal portfolio choices of CEOs (level of diversification). Looks at Tobin's Q, size of firm, cash flow and firm fixed effects, as well as share price reaction to merger announcements. Considers timing of the exercise of options. Adds newspaper comment on CEOs.
Findings - Finds that overconfidence measured by revealed beliefs, and by press comment, is associated with hubris in mergers, and with distribution of shareholder value to the benefit of target shareholders.
Research limitations/implications - Argues this hubris explanation makes sense of agency theory of private benefits in the mistaken belief of increasing shareholder value.
Practical implications - Proposes independent directors discipline CEOs through capital structure and project selection.
Originality/value - Presents new evidence about CEO behaviour.