Ceo Overconfidence Case Study

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Section I. Research Question Main research question: How does CEO overconfidence affect firms’ M&A performance? Under the traditional corporate finance studies, we usually assume managers and investors to be rational. However, recent research in behavioral corporate finance proposed the effect of managerial traits on corporate financial decisions and performances. For instance, overconfident managers tend to overestimate the returns and underestimate the risk, thus, the managerial hubris will lead to over value target firms in M&A and lead to value-destroying mergers (Malmendier and Tate (2008)), the value-restructured M&A often occurs especially in International M&A and M&A in order seeking for diversification. Meanwhile, overconfident CEOs…show more content…
How to measure CEO overconfidence? 2. How does CEO overconfidence affect the M&A decision and stock return performance? 3. Are there any diversifies of the effect on the stock price due to CEOs’ confidence among industries, countries, motivations and time periods? Section II. Related…show more content…
It explained the overpricing the target firm during the takeover by the manager’s hubris predicts. To further understand the effect CEO’s overconfidence in M&A decision, Malmendier and Tate (2008) analyzed the impact of overconfidence on mergers. The study first used the “longholder” of the option as a proxy for CEO’s overconfidence and concluded that overconfident CEOs conducted acquisition more frequently in firms with abundant cash, and created less value than rational CEOs. I addition, the study used the press to measure the CEOs’ personality and confirmed the results. As the key factor of the research, the question of how to measure the CEOs’ overconfident comes to the fore. Campbell et al. (2011) summarized the previously proposed measurement of CEO overconfidence and use four sets of optimism measures: the stock option holding measure, the press portrait measure, the net stock purchases measure, and the measurement based on the investment level. Besides the value erosion and shareholder’s value destruction caused by the CEO’s optimism in M&A, Hirshleifer, Low, and Teoh (2012) believed that overconfidence CEOs are more innovation and respond to the investment opportunities more effective. In this way, they can realize value and benefit firms, especially in innovation industries. And from that, we can further apply it into the
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