Hubris, Learning, and M&A Decisions
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.
|Date of creation:||11 May 2005|
|Date of revision:|
|Contact details of provider:|| Postal: 110 Westwood Plaza, Los Angeles, CA. 90095|
Web page: http://www.escholarship.org/repec/anderson_fin/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Brian J. Hall & Jeffrey B. Liebman, 1998.
"Are CEOs Really Paid Like Bureaucrats?,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 113(3), pages 653-691.
- Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
- Brian J. Hall & Kevin J. Murphy, 2000.
"Stock Options for Undiversified Executives,"
NBER Working Papers
8052, National Bureau of Economic Research, Inc.
- 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.
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
- 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.
- Rafael Rob, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Oxford University Press, vol. 58(4), pages 655-675.
- 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.
- Sudip Datta, 2001. "Executive Compensation and Corporate Acquisition Decisions," Journal of Finance, American Finance Association, vol. 56(6), pages 2299-2336, December.
- Henry G. Manne, 1965. "Mergers and the Market for Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 73, pages 110.
- Zeira, Joseph, 1987. "Investment as a Process of Search," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 204-10, February.
- Shleifer, Andrei & Vishny, Robert W., 2003.
"Stock market driven acquisitions,"
Journal of Financial Economics,
Elsevier, vol. 70(3), pages 295-311, December.
- Jonathan B. Berk, 2004. "Valuation and Return Dynamics of New Ventures," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 1-35.
- Joseph P. H. Fan & Vidhan K. Goyal, 2006. "On the Patterns and Wealth Effects of Vertical Mergers," The Journal of Business, University of Chicago Press, vol. 79(2), pages 877-902, March.
- 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.
- Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
- 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.
- Henry G. Manne, 1965. "Mergers and the Market for Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 73, pages 351.
- Richard J. Rosen, 2004. "Betcha can’t acquire just one: merger programs and compensation," Working Paper Series WP-04-22, Federal Reserve Bank of Chicago.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:cdl:anderf:qt7j94111c. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lisa Schiff)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.