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Contribution Details
| Type | Journal Article |
| Scope | Discipline-based scholarship |
| Title | Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction |
| Organization Unit | |
| Authors |
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| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published in final form |
| Language |
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| Journal Title | Journal of Financial Economics |
| Publisher | Elsevier |
| Geographical Reach | international |
| ISSN | 0304-405X |
| Volume | 89 |
| Number | 1 |
| Page Range | 20 - 43 |
| Date | 2008 |
| Abstract Text | Does CEO overconfidence help to explain merger decisions? Overconfident CEOs over-estimate their ability to generate returns. As a result, they overpay for target companies and undertake value-destroying mergers. The effects are strongest if they have access to internal financing. We test these predictions using two proxies for overconfidence: CEOs’ personal over-investment in their company and their press portrayal. We find that the odds of making an acquisition are 65% higher if the CEO is classified as overconfident. The effect is largest if the merger is diversifying and does not require external financing. The market reaction at merger announcement (-90 basis points) is significantly more negative than for non-overconfident CEOs (-12 basis points). We consider alternative interpretations including inside information, signaling, and risk tolerance. |
| Free access at | Official URL |
| Digital Object Identifier | 10.1016/j.jfineco.2007.07.002 |
| Other Identification Number | merlin-id:5948 |
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