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

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Author Info
Ulrike Malmendier
Geoffrey Tate
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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10813.

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Date of creation: Oct 2004
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Handle: RePEc:nbr:nberwo:10813

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Find related papers by JEL classification:
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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