Managerial Overconfidence, the Odds of Completing a Merger, and Post-Merger Performance

Abstract

We postulate that the level of managerial overconfidence is a critical factor influencing the likelihood of completing a merger. Using keywords in press portrayals to gauge managerial overconfidence (Malmendier and Tate, 2005b) we find that the managerial overconfidence of acquiring (target) firms is positively (negatively) related with the odds of completing a merger. The results hold for three datasets: acquiring firms listed in Taiwan, target firms listed in Taiwan, and both acquiring firms and target firms listed in Taiwan. The negative correlation between managerial overconfidence and abnormal returns around the time of the announcement shows the market lends little credence to such overconfidence. Managerial overconfidence is also detrimental to long-run post-merger performance measures. Our results go beyond the intuitive inference that managerial overconfidence is positively correlated with merger premium and therefore with the likelihood of completing a merger. We find that both managerial overconfidence and merger premium have significant effects on the odds of completing a merger, and that managerial overconfidence when being isolated from merger premium significant affects the likelihood of merger completion. We also find that corporate governance weakens the positive association between managerial overconfidence and the likelihood of completing a merger.