Are Overconfident CEOs Born or Made? Evidence of Self-Attribution Bias from Frequent Acquirers

Abstract

We explore the history of mergers and acquisitions made by individual CEOs. Our study has three main findings: (1) CEOs' first deals exhibit zero announcement effects while their subsequent deals exhibit negative announcement effects; (2) while acquisition likelihood increases in the performance associated with previous acquisitions, previous positive performance does not curb the negative wealth effects associated with subsequent deals; and (3) CEOs' net purchase of stock is greater preceding subsequent deals than it is for first deals. We interpret these results as consistent with self-attribution bias leading to overconfidence. We also find evidence that the market anticipates future deals based on the CEO's acquisition history and impounds such anticipation into stock prices.overconfidence, hubris, self-attribution, frequent acquirer, mergers and acquisitions, insider trading

Do They Walk the Talk? Gauging Acquiring CEO and Director Confidence in the Value Creation Potential of Announced Acquisitions

“…Our findings that acquiring CEOs sell stock and exercise options following acquisition announcements suggest that those CEOs do not appear to hold high levels of confidence in the long-term value creation potential of particular focal acquisitions. Our findings, coupled with those of Tate (2005, 2008) and Billet and Qian (2008), imply an interesting pattern that suggests that although confident CEOs may tend to undertake acquisitions, they do not necessarily have great confidence in the value enhancement potential of those deals. Instead, these confident CEOs may focus on the private interest benefits associated with acquisitions, such as greater power and compensation, rather than on value enhancement motives, when weighing acquisition decisions.…”

“…Relatedly, our study complements a nascent line of finance research that has examined the role of CEO overconfidence and acquisition behavior (e.g., Malmendier & Tate, 2005Billet & Qian, 2008). This research speaks to the effect of generalized CEO confidence on acquisition likelihood.…”

Overconfidence Among Professional Investors: Evidence from Mutual Fund Managers

“…Odean (1998) and Benos (1998) show theoretically that overconfidence leads to an increase in trading activity. The mechanism driving this effect is that overconfident 9 Similar evidence is provided in Malmendier and Tate (2008), Ben-David et al (2007, and Billett and Qian (2008).…”

The effect of merger anticipation on bidder and target firm announcement period returns

“…However, if investors can predict merger announcements, this important assumption is violated. Indeed, Billett and Qian (2008) find evidence that the market anticipates future acquisition deals based on the CEO's acquisition history and impounds such anticipation into stock prices. Similarly, Song and Walkling (2000) find that rivals of initial acquisition targets earn abnormal returns because of the increased probability that they will be targets themselves.…”