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

Ulrike Malmendier () and Geoffrey Tate
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Geoffrey Tate: U of Pennsylvania

Research Papers from Stanford University, Graduate School of Business

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.

Date: 2003-12
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Related works:
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 (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:1798

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