Overconfident CEOs and Bad Acquisitions

A couple of days ago, I wrote about a New York Times article on some of the causes of "Bad Mergers". Managerial overconfidence often plays a major role in really, really bad decisions. This recent piece on the SSRN by Matthew Billett and Yiming Qian, titled "Are Overconfident Managers Born or Made? Evidence of Self Attribution Bias From Frequent Acquirers " seems to indicate that managers learn to be overconfident. Here 's the abstract:

We explore the source of managerial hubris in mergers and acquisitions by examining the history of deals made by individual acquirers. Our study has three main findings: (1) Compared to their first deals, acquirers of second and higher-order deals experience significantly more 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 future deals; (3) Top management's net purchase of stock is greater preceding high order deals than it is for first deals. We interpret these results as consistent with self-attribution bias leading to managerial overconfidence. We also find evidence that the market anticipates future deals based on an acquirer's acquisition history and impounds such anticipation into stock prices.

Self-attribution bias refers to our natural tendency to attibute good results to our own skill, and bad results to external factors. Billet and Qian's evidence supports the notioin that managers fall prey to mself-attribution bias and get overconfident following the completion of an acquisition, First, (and not surprisingly), they find that successful acquisitions by a manager lead to subsequent acquisitions. However, they also find that subsequent acquisitions do significanlty worse than initial ones. So, they probably should have quit while they were ahead.

Yet another paper I wish I'd thought of.