Who Makes Acquisitions? CEO Overconfidence and the Market's Reaction

Ulrike Malmendier () and Geoffrey Tate

No 10813, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Overconfident CEOs over-estimate their ability to generate returns. Thus, on the margin, they undertake mergers that destroy value. They also perceive outside finance to be over-priced. We classify CEOs as overconfident when, despite their under-diversification, they hold options on company stock until expiration. We find that these CEOs are more acquisitive on average, particularly via diversifying deals. The effects are largest in firms with abundant cash and untapped debt capacity. Using press coverage as "confident" or "optimistic" to measure overconfidence confirms these results. We also find that the market reacts significantly more negatively to takeover bids by overconfident managers.

JEL-codes: D80 G14 G32 G34 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-acc, nep-cfn and nep-fin
Note: AP
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Citations: View citations in EconPapers (6)

Published as Malmendier, Ulrike and Geoffrey Tate. "Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction." Journal of Financial Economics 89, 1 (July 2008): 20-43.

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Journal Article: Who makes acquisitions? CEO overconfidence and the market's reaction (2008)
Working Paper: Who Makes Acquisitions? CEO Overconfidence and the Market's Reaction (2003)
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