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

  • Ulrike Malmendier
  • Geoffrey Tate

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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Publication status: published as Malmendier, Ulrike and Geoffrey Tate. "Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction." Journal of Financial Economics 89, 1 (July 2008): 20-43.
Handle: RePEc:nbr:nberwo:10813
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