CEO OVERCONFIDENCE AND CORPORATE TAKEOVERS: AN M&A WAVE CYCLE ANALYSIS

Abstract

I argue that overconfidence plays a role in shaping the way CEOs react to M&A waves and recessions. Replicating Malmendier and Tate’s 2008 study on CEO overconfidence and corporate takeovers, I reproduce their overconfidence proxy based on option exercise behavior and regress a company level M&A deal flow indicator on it and their control variables. I further analyze the impact of overconfidence segmented across M&A waves, recessions and regular years – the latter defined as years that are neither recession nor wave years – over a sample of 492 large US public companies. In doing so I complement the literature on behavioral explanations for the M&A wave cycle with the theory of managerial overconfidence in relation to individual decision making on corporate takeovers. I find that overconfident CEOs become less acquisitive to a greater extent during the recessions following M&A waves, becoming more acquisitive to a lesser extent during M&A waves and being tendentially more acquisitive although not to a statistically significant extent during the remaining years.