Acquisitions, Overconfident Managers and Self-attribution Bias
By John A. Doukas, D. Petmezas. 2007
388 citations recorded by the source corpus.
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.
Subfields: Accounting, Finance
View Paper: https://www.semanticscholar.org/paper/362b5abfbfa31bd434d3a16f699d4668fb4bda9a
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In Accounting
- Lammertjan Dam
- Bert Scholtens
- Yi Tang
- Terrance Odean
- Jiatao Li
- Franklin Allen
- Bruce I. Carlin
- Peter L. Swan
In Finance
- Bert Scholtens
- Lammertjan Dam
- Terrance Odean
- Franklin Allen
- Bruce I. Carlin
- Jiatao Li
- Peter L. Swan
- Marti G. Subrahmanyam
Citations in the corpus
- Does Ownership Type Matter for Corporate Social Responsibility (2012, background): “This contrasts with the results of Andrade et al. (2001), Cartwright and Schoenberg (2006), Doukas and Petmezas (2007) and Hagendorff et al. (2007).”
- Behavioural Finance: A Review and Synthesis (2007, neutral): “Doukas and Petmezas (2005) find support for the self-attribution hypothesis in the market for corporate control.”
- Overconfidence, Compensation Contracts, and Capital Budgeting (2011, background): “Doukas and Petmezas (2007) and Billett and Qian (2008) also find that CEOs tend to become overconfident after a successful acquisition, and as a result are more likely to follow it with acquisitions that negatively impact their firm’s stock price.”
- CEO Optimism and Incentive Compensation (2014, neutral): “…related papers on the effects of managerial biases and personal characteristics on corporate decisions and outcomes include Brown and Sarma (2007) and Doukas and Petmezas (2007) on the impact on acquisitions, and Hribar and Yang (2013) on the impact on forecast behavior and earnings management.”
- The Origin of Failure: A Multidisciplinary Appraisal of the Hubris Hypothesis and Proposed Research Agenda (2014, background): “Other empirical studies from the finance field use frequent and multiple acquisitions as a proxy for CEO overconfidence (Doukas & Petmezas, 2007; Heaton, 2002).”
- CEO Hubris and Firm Risk Taking in China: The Moderating Role of Managerial Discretion (2010, background): “Doukas and Petmezas (2007) showed that managerial overconfidence could lead to lower announcement returns and poor long-term performance in M&A situations.”
- CEO Overconfidence and International Merger and Acquisition Activity (2013, neutral): “Do overconfident CEOs finance 2The study by Doukas and Petmezas (2007) does investigate overconfidence among U.K. executives.”