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Bidder Hubris and Founder TargetsFrederik P. SchlingemannUniversity of Pittsburgh - Finance Group; Rotterdam School of Management (Erasmus University) Nandu J. NagarajanUniversity of Pittsburgh - Katz Graduate School of Business Marieke Van der PoelErasmus University - Rotterdam School of Management Mehmet F. YalinUniversity of Pittsburgh - Katz Graduate School of Business December 20, 2012 Abstract: Managerial hubris leads to overpayment for acquisitions if bidders overestimate the target’s stand-alone value under their control. We provide a unique test of this, analyzing whether bidders overpay for founder targets because they assume the value of the founder CEOs’ human capital stays intact post-acquisition. We show that the founder CEOs’ human capital is valuable and embedded in the ex-ante target value, and that this component is negatively related with bidder and synergy returns. Our findings suggest that bidders underestimate the value of founder CEOs’ firm-specific human capital and overestimate the value of targets as stand-alone firms under their control.
Number of Pages in PDF File: 65 Keywords: Hubris, founder, bidder gains, mergers and acquisitions, CEO JEL Classification: G30, G34 working papers seriesDate posted: March 12, 2012 ; Last revised: January 14, 2013Suggested CitationContact Information
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