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 realise 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." Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

Investment Decisions and Socio-demographic Characteristics – Empirical Evidence from Germany

“…Results are in line with those of Choi and Dong (2008) and also Doukas and Petmezas (2007). Self-Attribution Bias can be particularly problematic in times of rising stock prices.…”

“…Overconfidence leads to investing in industries which are not in the circle of competence of those investors. Doukas and Petmezas (2007) also find a relationship between Self-Attribution Bias and Overconfidence for institutional investors. Overconfidence leads to excessive trading, which is responsible for poor investment results (Doukas & Petmezas, 2007).…”

What drives acquisitions?

“…Our results, which are not presented for brevity, are qualitatively similar and are available upon request. 13 This result is in line with the evidence of Chang (1998), Fuller, Netter andStegemoller (2002) and Doukas and Petmezas (2007) who document substantial gains in acquisitions of privately held firms. Consistent with the U.S. evidence, U.K. studies (Draper and Paudyal (2006), among others) report negative and significant bidder abnormal returns for public acquisitions surrounding merger announcements.…”

Can Overconfident Executives Restrain Overinvestment?

“…In the case of M & A investment, Malmendier U et al [7] and Doukas J.A. [8] found that the over-confident CEOs have a higher probability than that of non-over-confident CEOs in the M & A investment , and paid higher prices, obtain Lower yields, which will finally damage the corporate benefits [9] [10] [11].…”