Explaining the Premiums Paid for Large Acquisitions: Evidence of CEO Hubris

When overconfidence is revealed to others: Testing the status-enhancement theory of overconfidence

“…Constraints unrelated to status might limit its social benefits (Camerer & Lovallo, 1999;Dunning et al, 2004;Hayward & Hambrick, 1997;Odean, 1998). For example, overestimating one's task abilities might create a tendency to generate unrealistic goals, creating physical or psychological dangers (McGraw, Mellers, & Ritov, 2004).…”

What Drives the Payment of Higher Merger Premiums?

“…His hubris hypothesis suggests bidder managers engage in mergers and acquisitions with an overly optimistic opinion of their abilities to create value, and this results in paying higher premiums to targets. In addition, the result of Hayward and Hambrick's (1997) study suggests that CEO hubris, manifested as exaggerated pride or self-confidence, plays a substantial role in the merger process, particularly in the decision of how much to pay. Other studies (e.g., Hietala et al 2003;Morck et al 1990;Shleifer and Vishny 1989) also indicate that bidders tend to pay higher premium to target firms, which are reflected in their negative stock returns during takeover announcements.…”

Tackling the "Galacticos" effect: team familiarity and the performance of star-studded projects

“…Similarly, as Pfeffer (1981: 22) noted, "one of the important ways of generating external support … [is] through identification of the organization with socially valued and accepted individuals." By contrast, research on group dynamics and social-psychology highlights coordination costs that may arise from the overconfidence and hubris in professionals anointed as stars, despite their productivity and signalling effects (Hayward and Hambrick, 1997;Wade et al, 2006). In a star-studded team, individuals may care more about their personal performance relative to the other team members, rather than their team performance relative to that of other teams (Overbeck et al, 2005).…”