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Hubris, Learning, and M&A Decisions

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  • Aktas, Nihat
  • de Bodt, Eric
  • Roll, Richard
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    Abstract

    Are CEOs unable to learn? This surprising question deserves to be raised in the light of the declining pattern of cumulative abnormal returns observed in M&A programs. This paper shows that this pattern is the expected ex post empirical evidence for rational risk averse CEOs. Our theoretical argument is that from deal to deal, rational CEOs become more aggressive in the bidding process. They concede increasing fractions of expected synergies to the target shareholders in order to win the bidding game. For CEOs infected by hubris, the learning process should allow them to progressively correct over-optimism and overconfidence, if they survive.

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    File URL: http://www.escholarship.org/uc/item/7j94111c.pdf;origin=repeccitec
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    Bibliographic Info

    Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt7j94111c.

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    Date of creation: 11 May 2005
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    Handle: RePEc:cdl:anderf:qt7j94111c

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    15. Mark L. Mitchell & Kenneth Lehn, 1990. "Do Bad Bidders Become Good Targets?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 3(2), pages 60-69.
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    18. Mitchell, Mark L & Lehn, Kenneth, 1990. "Do Bad Bidders Become Good Targets?," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 372-98, April.
    19. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
    20. Sudip Datta, 2001. "Executive Compensation and Corporate Acquisition Decisions," Journal of Finance, American Finance Association, vol. 56(6), pages 2299-2336, December.
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