Abstract

http://ssrn.com/abstract=601115
 
 

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


Ulrike Malmendier


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

Geoffrey A. Tate


University of North Carolina Kenan-Flagler Business School

October 2004

NBER Working Paper No. w10813

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.

Number of Pages in PDF File: 54

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Date posted: October 18, 2004  

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: http://ssrn.com/abstract=601115

Contact Information

Ulrike Malmendier (Contact Author)
University of California, Berkeley - Department of Economics ( email )
549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
(510) 642-8724 (Phone)
(510) 642-6615 (Fax)
HOME PAGE: http://www.econ.berkeley.edu/~ulrike/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=918
Geoffrey A. Tate
University of North Carolina Kenan-Flagler Business School ( email )
McColl Building
Chapel Hill, NC 27599-3490
United States

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