Who Makes Acquisitions? CEO Overconfidence and the Market's Reaction / Ulrike Malmendier, Geoffrey Tate.

Format:

Book

Author/Creator:

Malmendier, Ulrike.

Contributor:

National Bureau of Economic Research.

Tate, Geoffrey.

Series:

Working Paper Series (National Bureau of Economic Research) no. w10813.

NBER working paper series no. w10813

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2004.

Summary:

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.

Notes:

Print version record

October 2004.