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

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  • Malmendier, Ulrike M.

    (Stanford U)

  • Tate, Geoffrey

    (U of Pennsylvania)

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.

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Bibliographic Info

Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1798.

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Date of creation: Dec 2003
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Handle: RePEc:ecl:stabus:1798

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