Empirical Evidence of Overbidding in M&A Contests

Abstract

Overbidding implies a failure to adequately account for the winner’s curse. Surprisingly few papers have attempted to develop a direct empirical test of the presence of overbidding in M&A contests. We develop such a test grounded on a necessary condition for profit maximizing bidding behavior; the test is not subject to endogeneity concerns. Our results strongly support the existence of overbidding. We provide evidence that overbidding is related to the joint presence of conflicts of interest and irrational bidding behavior.

Keywords: mergers and acquisitions, hubris hypothesis, overbidding

JEL Classification: G34