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Hubris, Learning, and M&A Decisions

  • Aktas, Nihat
  • de Bodt, Eric
  • Roll, Richard
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    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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    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
    Date of revision:
    Handle: RePEc:cdl:anderf:qt7j94111c
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    9. 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.
    10. Shleifer, Andrei & Vishny, Robert W, 1988. "Value Maximization and the Acquisition Process," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 7-20, Winter.
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    14. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
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    16. Shleifer, Andrei & Vishny, Robert W., 1989. "Management entrenchment : The case of manager-specific investments," Journal of Financial Economics, Elsevier, vol. 25(1), pages 123-139, November.
    17. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 655-75, July.
    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. Schipper, Katherine & Thompson, Rex, 1983. "Evidence on the capitalized value of merger activity for acquiring firms," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 85-119, April.
    20. Omesh Kini & William Kracaw & Shehzad Mian, 2004. "The Nature of Discipline by Corporate Takeovers," Journal of Finance, American Finance Association, vol. 59(4), pages 1511-1552, 08.
    21. Berkovitch, Elazar & Narayanan, M. P., 1993. "Motives for Takeovers: An Empirical Investigation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(03), pages 347-362, September.
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