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… Show more
“…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.…”
Section: Discussionsupporting
confidence: 56%
“…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.…”
We explore whether acquiring CEOs and directors act consistently with the idea that their newly announced acquisitions will increase long-term firm value. Specifically, we examine postannouncement adjustments to CEOs' equity-based holdings and find acquiring CEOs tend to exercise options and sell firm stock following acquisition announcements. Moreover, positive short-term market performance exacerbates this effect. Further, we find directors tend to grant their acquiring CEOs stock options, after acquisition announcement, presumably to more tightly align CEO-shareholder interests. These findings suggest that when CEOs and directors manage acquiring CEOs' equity-based holdings, they do not appear to anticipate long-term value creation from their 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.…”
Section: Discussionsupporting
confidence: 56%
“…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.…”
We explore whether acquiring CEOs and directors act consistently with the idea that their newly announced acquisitions will increase long-term firm value. Specifically, we examine postannouncement adjustments to CEOs' equity-based holdings and find acquiring CEOs tend to exercise options and sell firm stock following acquisition announcements. Moreover, positive short-term market performance exacerbates this effect. Further, we find directors tend to grant their acquiring CEOs stock options, after acquisition announcement, presumably to more tightly align CEO-shareholder interests. These findings suggest that when CEOs and directors manage acquiring CEOs' equity-based holdings, they do not appear to anticipate long-term value creation from their acquisitions.
“…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).…”
Section: Turnover Ratio As a Proxy For Overconfidencementioning
“…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.…”
This paper examines investors' anticipation of bidder and target merger candidacy and if investor anticipations about candidacy affect the distribution of value between bidder and target firm shareholders. We find that bidder firms can be predicted more accurately than target firms. To investigate how merger announcement period returns are distributed among bidder and target shareholders, we control for different degrees of predictability in bidder and target selection and find that the difference between bidder and target firm three-day cumulative abnormal returns around a merger announcement decreases significantly. Thus, the evidence supports the hypothesis that the asymmetry in investor anticipations about merger candidacy causes disparity in bidder and target firm announcement period abnormal returns.
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