CEO overconfidence effects on mergers and acquisitions

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dc.contributor Aalto-yliopisto fi
dc.contributor Aalto University en Nguyen, Thanh Thuy 2015-12-16T08:18:08Z 2015-12-16T08:18:08Z 2015
dc.description.abstract The purpose of the study is to extend further from the result studying overconfidence effects of CEOs on single deal of Malmendier and Tate (2008)'s article to study overconfidence effects of CEOs on multiple mergers and acquisitions. Based on the psychological and financial theories, the likelihood of overconfident CEOs acquiring a company is the net effect of two manifestations of overconfidence. The first manifestation is called miscalibration in psychology. Under this manifestation, overconfident CEOs overestimate the benefits and underestimate the costs of the merger. Thus, it increases the odds of overconfident CEOs undertaking the acquiring project. On the other hand, the second manifestation is called ''better-than-average'' effect. Under this manifestation, overconfident CEOs will curb investment to avoid external finance if the firms do not have sufficient internal fund. The reason for this biased decision is because overconfident CEOs believe that their firms are undervalued by the market. They want to avoid external finance so that the mispricing gap does not become greater. The net effect of the two manifestations of overconfidence on the probability of overconfident CEOs pursuing multiple mergers and acquisitions (M&A) is debatable. Malmendier and Tate (2008) empirically prove that overconfident CEOs are more likely to purchase another firm than non-overconfident colleagues in single deal. Moreover, the announcement effect of single deal by overconfident CEOs is significantly more negative than their rational counterparts' results. The sample used in the study consists of 622 mergers of 306 firms occurred in the US during 2006-2013. The data is retrieved from SDC Platinum, Center for Research in Security Prices (CRSP) and Compustat. I find no evidence about the acquisitiveness and the worse performance of overconfident CEOs compared to others in multiple M&As. My findings suggest that overconfident CEOs are equally acquisitive as non-overconfident CEOs in multiple deals. Their multiple M&A deals receive similar announcement returns to others' during the normal economic cycle. One interesting observation is that during the financial crisis overconfident CEOs are more acquisitive in multiple acquisitions than rational CEOs. Although the majority of overconfident CEO's mergers are diversifying, they still receive significantly positive abnormal returns as opposed to the non-overconfident counterparts'. The reason for the interesting findings can be either investor sentiment or the external support of a strong and independent board as well as CEO's personal trading experience. en
dc.format.extent 58
dc.format.mimetype application/pdf en
dc.language.iso en en
dc.title CEO overconfidence effects on mergers and acquisitions en
dc.type G2 Pro gradu, diplomityö fi Kauppakorkeakoulu fi School of Business en
dc.contributor.department Rahoituksen laitos fi
dc.contributor.department Department of Finance en
dc.subject.keyword CEO overconfidence
dc.subject.keyword multiple mergers and acquisitions
dc.subject.keyword acquisitiveness
dc.subject.keyword financial crisis
dc.identifier.urn URN:NBN:fi:aalto-201512165825
dc.type.dcmitype text en
dc.programme.major Finance en
dc.programme.major Rahoitus fi
dc.type.ontasot Master's thesis en
dc.type.ontasot Pro gradu tutkielma fi
dc.subject.helecon rahoitus
dc.subject.helecon financing
dc.subject.helecon johtaminen
dc.subject.helecon management
dc.subject.helecon yrityskaupat
dc.subject.helecon corporate acquisitions
dc.subject.helecon kriisi
dc.subject.helecon crisis
dc.ethesisid 14206 2015-12-04
dc.location P1 I

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