Acquisitions, Overconfident Managers and Self-Attribution Bias

Abstract

We examine whether acquisitions by overconfident managers generate superior abnormal returns and whether managerial overconfidence stems from self-attribution. Self-attribution bias suggests that overconfidence plays a greater role in higher order acquisition deals predicting lower wealth effects for higher order acquisition deals. Using two alternative measures of overconfidence (1) high order acquisition deals and (2) insider dealings we find evidence supporting the view that average stock returns are related to managerial overconfidence. Overconfident bidders realize lower announcement returns than rational bidders and exhibit poor long-term performance. Second, we find that managerial overconfidence stems from self-attribution bias. Specifically, we find that high-order acquisitions (five or more deals within a three-year period) are associated with lower wealth effects than low-order acquisitions (first deals). That is, managers tend to credit the initial success to their own ability and therefore become overconfident and engage in more deals. In our analysis we control for endogeneity of the decision to engage in high-order acquisitions and find evidence that does not support the self-selection of excessive acquisitive firms. Our analysis is robust to the influence of merger waves, industry shocks, and macroeconomic conditions.

Keywords: Managerial Overconfidence, Self-Attribution Bias, Mergers and Acquisitions, Corporate Governance, Short-term and Long-term Performance.

JEL Classification: G14, G30, G34