Abstract
Our study suggests an important but often overlooked explanation for why so many acquirers pay high acquisition premiums for their acquisition targets, and who is more to blame for the winner’s curse. We propose an ownership bias theory of acquisition premiums to test the idea that many acquisitions are overpaid because loss-averse family chief executive officers (CEOs) of both acquiring and target companies are particularly prone to ownership biases widely known as pseudo-endowment and endowment effects, respectively. Adopting a bonding perspective, we also predict that bidder shareholders are likely to react more negatively to overpaid acquisitions of non-family CEOs than to those of family CEOs. We find strong evidence in support of these hypotheses from an analysis of a sample of 1,344 domestic acquisitions that involve 588 acquiring firms and 719 target firms in China from 1998 to 2019.
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