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

54 Pages Posted: 18 Oct 2004 Last revised: 20 Jul 2022

See all articles by Ulrike Malmendier

Ulrike Malmendier

University of California, Berkeley - Department of Economics; University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Geoffrey A. Tate

University of Maryland - Robert H. Smith School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2004

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.

Suggested Citation

Malmendier, Ulrike and Tate, Geoffrey A., Who Makes Acquisitions? CEO Overconfidence and the Market's Reaction (October 2004). NBER Working Paper No. w10813, Available at SSRN: https://ssrn.com/abstract=601115

Ulrike Malmendier (Contact Author)

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Geoffrey A. Tate

University of Maryland - Robert H. Smith School of Business ( email )

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National Bureau of Economic Research (NBER)

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