The Blind Power: Power-Driven CEO Overconfidence and M&A Decision Making

44 Pages Posted: 12 Dec 2018

See all articles by Hyoseok (David) Hwang

Hyoseok (David) Hwang

University of Wisconsin at Eau Claire

Hyun-Dong Kim

Korea University Business School (KUBS)

Kim Taeyeon

Korea Advanced Institute of Science and Technology (KAIST), College of Business

Date Written: March 27, 2018

Abstract

The behavioral finance literature attributes failed M&As to CEO overconfidence. We investigate the source of CEO overconfidence that leads to failed M&As. Among various determinants of CEO overconfidence, we propose that power-led CEO overconfidence delivers undesirable consequences in corporate investments. Using CEO-level data, we find that CEO power increases the probability of a CEO being overconfident. We also show that power-driven overconfident CEOs tend to complete more deals regardless of circumstances, do stock acquisitions, and make value-destroying acquisitions, relative to non-overconfident CEOs. The results suggest that previous studies on M&As by overconfident CEOs are mainly led by power-driven overconfident CEOs.

Keywords: CEO Overconfidence; CEO Power; Mergers and Acquisitions

JEL Classification: D91; G34; G41; M12

Suggested Citation

Hwang, Hyoseok and Kim, Hyun-Dong and Taeyeon, Kim, The Blind Power: Power-Driven CEO Overconfidence and M&A Decision Making (March 27, 2018). Available at SSRN: https://ssrn.com/abstract=3280562 or http://dx.doi.org/10.2139/ssrn.3280562

Hyoseok Hwang (Contact Author)

University of Wisconsin at Eau Claire ( email )

Eau Claire, WI 54702
United States

Hyun-Dong Kim

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701

Kim Taeyeon

Korea Advanced Institute of Science and Technology (KAIST), College of Business ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul
Korea, Republic of (South Korea)

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