The Hubris Hypothesis of Corporate Takeovers

Abstract

The Hubris Hypothesis of Corporate Takeovers* Finally, knowledge of the source of takeover gains still eludes us. [Jensen and Ruback 1983, p. 47] * The earlier drafts of this paper elicited many comments. It is a pleasure to acknowledge the benefits derived from the generosity of so many colleagues. They corrected several conceptual and substantive errors in the previous draft, directed my attention to other results, and suggested other interpretations of the empirical phenomena. In general, they provided me with an invaluable tutorial on the subject of corporate takeovers. The present draft undoubtedly still contains errors and omissions, but this is due mainly to my inability to distill and convey the collective knowledge of the profession. Among those who helped were C. R. Alexander,

Human Resources Turnover as an Asset Acquisition, Accumulation and Divesture Process

“…In general, the reasons behind the purchase or sale can be grouped under the so-called nonsynergetic and synergetic theories, respectively (see, for example, Mulherin and Boone, 2000). In the first group, restructuring is thought to be the undertaken for reasons other than wealth creation and stems from managerial motives such as, for example, empire building, entrenchment and hubris (see Roll, 1986;Jensen, 1986;Shleifer and Vishny, 1989). These theories predict that acquisitions and divestures have an asymmetric effect on the wealth of participating firms.…”

Guideline Public Company Valuation and Control Premiums: An Economic Analysis

“…As Roll (1986) notes, a transaction will result if only one potential acquirer misvalues the target or overestimates future synergies. The framework for analyzing this scenario, which Roll refers to as the "hubris hypothesis for takeovers" is the same as that for synergies.…”

What Drive the Damage to Post-Merger Operating Performance?

“…In other words, the CEO plays a central role in the M&A decision-making process (see e.g., Roll 1986;Shleifer and Vishny 1988). During the decision-making process, the CEO may be influenced by the time when the merger is undertaken (inwave or non-wave), his or her own behavior (overconfident or not), the industry of the target firm (intra-or inter-industry), and the method of payment (stock or cash) to be used to complete the M&A.…”

“…Third, overconfidence is likely to be strongest when the reference point is abstract (Alicke et al, 1995). Linking overconfidence to corporate finance, Roll (1986) advances the idea that in corporate takeovers, the overconfidence managers engage in M&As with an overly optimistic opinion of their abilities to create value. Similarly, Heaton (2002) shows that common distortions in corporate investments may be the result of managers overestimating the returns on their investments.…”