Acquisitions as Lotteries: Do Managerial Gambling Attitudes Influence Takeover Decisions?
University of Mannheim - Department of Business Administration and Finance; University of Michigan, Stephen M. Ross School of Business
Oliver G. Spalt
Tilburg University - Department of Finance
September 9, 2013
This paper studies the impact of managerial gambling attitudes on corporate acquisitions. We construct a new lottery index that measures the attractiveness of a potential target as a gamble and show that higher index values are associated with lower announcement returns for the acquirer. This effect is substantial and acquirers lose on average 73bp or about $63 million in the three days around the announcement for a one standard deviation increase in the lottery index. Combined announcement returns (synergies) are lower and the takeover likelihood increases with the index. The effects are stronger when CEOs are more powerful and when their gambling propensity is high. These results are the first evidence to suggest that managerial gambling attitudes are a major determinant of takeover decisions. An important implication of our study is that a CEO preference for long shots can lead to large inefficiencies in resource allocation.
Number of Pages in PDF File: 40
Keywords: Behavioral Corporate Finance, Mergers and Acquisitions, Gambling
JEL Classification: G34, G14, G39working papers series
Date posted: April 1, 2010 ; Last revised: September 10, 2013
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