Who Makes Acquisitions?: A Test of the Overconfidence Hypothesis

Topics:
Equity,
Investment Strategy,
Mergers
Tags:
CEO,
Finance,
Investment,
Merger,
Mergers & Acquisitions,
University Of Pennsylvania
Source:
University of Pennsylvania

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Overview: This paper analyze whether the volume and returns of merger activities are affected by CEO overconfidence. Overconfident CEOs over-estimate their ability to generate returns and perceive outside finance to be over-priced. As a result, they undertake value-destroying mergers when they have abundant internal funds, and they may forego value-creating merger opportunities when they need to raise external funds. In order to test the overconfidence hypothesis, one employ detailed data on personal portfolio decisions of CEOs in Forbes 500 companies. One identifies CEOs who, despite their under-diversification, systematically fail to reduce their personal exposure to company risk by exercising highly in the money stock options.

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Format: PDF | Size: 492KB | Date: Sep 2004 | Pages: 18

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