Overconfident boards of directors in mergers and acquisitions

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School of Business | Master's thesis
Degree programme
83 + 3
This thesis studies how board overconfidence affects buy-side mergers and acquisitions (M&A) activity, bid premiums, and related announcement returns for acquiring firms. Existing research at the intersection of overconfidence and mergers and acquisitions has mainly focused on CEOs. Overconfident CEOs are shown to be more acquisitive, pay higher bid premiums, and experience lower announcement returns. Less attention has been given to boards although they are in charge of setting up the strategy, protecting shareholder wealth, and finally, approving the transactions. Further, directors are typically experienced professionals who have undergone M&A processes previously. The purpose of this thesis is to study whether overconfident directors are more active acquirers, pay higher bid premiums, and face lower announcement returns. The sample to study the acquisitiveness of overconfident boards consists of 46,717 firm-year observations, 5,279 unique firms and 8,962 completed M&A transactions between 2005 and 2020. Using negative binomial regression tests, the empirical results suggest that having at least one overconfident director increases the number of completed buy-side deals up to 31.2%. These results are statistically significant, robust to different regression model and different proxy for overconfidence. Due to additional data requirements, the sample shrinks to 401 completed deals in tests related to bid premium and acquirer announcement return tests. Although the baseline cross-sectional regression results are not statistically significant, additional tests present statistically significant evidence that overconfident boards pay lower bid premiums on average which may be caused by the redundancy to pay a higher premium to complete a deal especially if there are no competing bidders. Finally, I also present significant results that the market reacts more negatively to acquisition announcements made by firms with overconfident boards. These findings contribute to the existing literature by suggesting that board overconfidence is a meaningful factor in M&A activity. Further, board-level overconfidence may help explain lower acquisition announcement returns. Overall, investors and board nominating committees should not ignore possible board overconfidence in their decision-making. Studies in the future could extend the methodology of this thesis to study how board overconfidence affects other major strategical decisions such as internalization or CEO appointments.
Thesis advisor
Rantapuska, Elias
overconfidence, boards of directors, mergers and acquisitions, bid premium, acquisitiveness, announcement returns
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