Hubris Hypothesis Research Articles

How do takeovers in the United Kingdom split value gains between domestic deals' parties?

PurposeThis paper aims to address the question: What is the distribution of value (in pounds) created in a sample of domestic takeovers in the United Kingdom from 2013 to 2020 among acquirer and target stockholders?Design/methodology/approachThe author employs a traditional event study methodology to calculate the percentage excess returns of companies on the announcement date. These returns are then converted into pound-denominated excess returns using the companies' market capitalizations. This allows the author to estimate the synergies of the mergers and acquisitions (M&As) and how they are allocated between acquirers and targets. This innovative transformation from percentage to pound excess returns establishes a new ratio methodology for addressing the paper's objective.FindingsThis paper reveals that in UK takeovers, 40 percent of the synergies in pounds are allocated to the stockholders of acquiring companies, while 60 percent go to the stockholders of target companies. In other words, acquirers retain a significant portion—more than half—of the synergies generated in these domestic deals. This original finding is statistically significant at the one percent level and strongly contradicts the hypothesis that acquirers, at best, merely break even.Originality/valueThe evidence that UK takeovers distribute value gains nearly equally between domestic deal parties challenges the enduring conventional insight in the M&A literature. This conventional wisdom suggests that the value created by business combinations is entirely distributed to target company stockholders. Consequently, this reexamination may have broader implications, offering an alternative perspective on the motives behind business combinations. This perspective differs from the “managerial hubris hypothesis,” which aligns with the prevailing conventional insight but receives limited support in the original finding reported here.

CEO Overconfidence and Corporate Overseas M&A: The Case of Techcent Environment Company

Purpose – In recent years, overseas M&As have become an important way for enterprises to invest and expand. Yet, most overseas deals are not successful. Behavioral finance research attributes the failure of overseas M&A to the irrational cognition of corporate decision-makers: that is, overconfidence. This study focuses on exploring the relationship between CEO overconfidence and overseas M&A, and clarifying the impact of CEO overconfidence on the motivation, payment method, and corporate performance of overseas M&A. Design/Methodology/Approach – First, based on the hubris hypothesis, this study reviews the literature on CEO overconfidence and overseas M&A. Second, this study uses the case analysis method, taking Techcent Environmental Co., Ltd., as an example, to study the impact of CEO overconfidence on the motivation, payment method, and corporate performance of overseas M&A. Findings – Overconfident CEOs tend to make enterprises carry out overseas M&As and use cash in the settlement. At the same time, overconfident CEO overseas mergers and acquisitions have a negative impact on both short-term and long-term corporate performance. Research Implications – This study expands the scope of case studies on the theory of executive overconfidence in behavioral finance, verifies the hubris hypothesis, enriches the case study literature on CEO confidence in behavioral finance, and provides reference for the management and overseas M&As of corporate executives.

Mergers and Acquisitions in the Bombay Stock Exchange: Testing for Market Efficiency Using Panel Regression

M&As are inorganic growth strategies which are not only related to accounting measures of performance of firms but also affect the wealth of shareholders either positively or negatively. According to the hubris hypothesis (Roll, 1986), M&A announcements result in a decrease in the stock price of the acquiring firm, leading to a fall in its value. On the other hand, the synergy hypothesis states that the two firms merge to take advantage of economic gains that result from sharing of resources, resulting in increased returns to the shareholders of both firms. The purpose of this paper is to find out whether there is any difference in the stock price and returns before and after the announcement of M&A. Also, it has been found that Indian stock market is efficient in a semi-strong form in the event of successful merger announcements.

The Hubris Hypothesis: People Particularly Dislike Explicitly Comparative Braggers from Their Ingroup

The Hubris Hypothesis: People Particularly Dislike Explicitly Comparative Braggers from Their Ingroup

Firm-level recent profitability and acquisition performance: exploring competing theoretical perspectives

In light of the mixed findings upon whether good performers are good or bad acquirers, this paper explores the relationship between firm-level recent profitability and post-acquisition performance through the competing analysis of the managerial ability and the hubris hypotheses. The paper also builds on the organizational learning literature to examine the moderating effect played by a firm’s previous acquisition experience, as a potential contingency factor that may alter the performance effects of acquisitions. Based on a dataset of 469 acquisitions completed between 2007 and 2013, results provide support to the managerial ability hypothesis, according to which good performing firms exhibit better post-acquisition returns. Results also support the existence of learning benefits from previous acquisition experience, which further enhances the positive effect played by an acquirer’s recent profitability on post-acquisition performance.

When Praising Yourself Insults Others: Self-Superiority Claims Provoke Aggression.

We tested the prediction, derived from the hubris hypothesis, that bragging might serve as a verbal provocation and thus enhance aggression. Experiments 1 and 2 were vignette studies where participants could express hypothetical aggression; Experiment 3 was an actual decision task where participants could make aggressive and/or prosocial choices. Observers disliked an explicit braggart (who claimed to be "better than others") or a competence braggart as compared with an implicit braggart (who claimed to be "good") or a warmth braggart, respectively. Showing that explicit and competence bragging function as verbal provocations, observers responded more aggressively to the explicit and competence braggart than to the implicit and warmth braggart, respectively. They did so because they inferred that an explicit and a competence braggart viewed other people and them negatively, and therefore disliked the braggart. Rather than praising the self, braggarts are sometimes viewed as insulting others.

The hubris hypothesis: The downside of comparative optimism displays.

According to the hubris hypothesis, observers respond more unfavorably to individuals who express their positive self-views comparatively than to those who express their positive self-views non-comparatively, because observers infer that the former hold a more disparaging view of others and particularly of observers. Two experiments extended the hubris hypothesis in the domain of optimism. Observers attributed less warmth (but not less competence) to, and showed less interest in affiliating with, an individual displaying comparative optimism (the belief that one's future will be better than others' future) than with an individual displaying absolute optimism (the belief that one's future will be good). Observers responded differently to individuals displaying comparative versus absolute optimism, because they inferred that the former held a gloomier view of the observers' future. Consistent with previous research, observers still attributed more positive traits to a comparative or absolute optimist than to a comparative or absolute pessimist.

Why Self-enhancement Provokes Dislike: The Hubris Hypothesis and the Aversiveness of Explicit Self-superiority Claims

Most people believe that they are in many respects superior to others. When they publicly express their superiority, they may do so in an explicitly or implicitly comparative manner (“I am better than others” vs. “I am good”). According to the hubris hypothesis, observers dislike explicit self-superiority claims, because these suggest a negative view of others and hence of the observers. The results of two experiments were consistent with the hubris hypothesis. Participants evaluated explicit self-superiority claimants more unfavorably than implicit self-superiority claimants (Experiments 1–2). They attributed less warmth, but not less competence, to explicit than implicit self-superiority claimants (Experiment 2), and this occurred to the extent that participants inferred a negative view of others (Experiments 1–2) and hence of them (Experiment 2).

Changes in Cash: Persistence and Pricing Implications

ABSTRACTThis paper decomposes the cash component of earnings and analyzes persistence characteristics and pricing implications of various subcomponents, with particular attention to changes in cash. Changes in underlying fundamentals might dictate changes in cash to new optimal levels. Alternatively, suboptimal changes in cash might result from agency costs allowing managers’ actions to diverge from the best interests of shareholders. We predict and find that both suboptimal increases and decreases in cash bode poorly for future earnings. In fact, we find that suboptimal increases (decreases) in cash have less (greater) persistence than any of the earnings components we study, including accruals and net distributions to both shareholders and debt holders. Market efficiency tests indicate that the market severely punishes firms with suboptimal decreases in cash, but we find no evidence to support the hubris hypothesis that the market overreacts to the earnings implications of unwarranted increases in cash.

Changes in Cash: Persistence and Pricing Implications

This paper decomposes the cash component of earnings and analyzes persistence characteristics and pricing implications of various subcomponents, with particular attention on changes in cash. Changes in underlying fundamentals might dictate changes in cash to new optimal levels. Alternatively, suboptimal changes in cash might result from agency costs allowing managers’ actions to diverge from the best interests of shareholders. We predict and find that both suboptimal increases and decreases in cash bode poorly for future earnings. In fact, we find that suboptimal increases (decreases) in cash have less (greater) persistence than any of the earnings components we study, including accruals and net distributions to both shareholders and debt holders. Market efficiency tests indicate that the market severely punishes firms with suboptimal decreases in cash, but we find no evidence to support the hubris hypothesis that the market overreacts to the earnings implications of unwarranted increases in cash.

The Origin of Failure: A Multidisciplinary Appraisal of the Hubris Hypothesis and Proposed Research Agenda

The hubris hypothesis complements the extant debate on how people make judgments and decisions in organizations. Drawing on the origin of hubris in Greek mythology, the psychological approach, and finance studies, this paper portrays an informed picture of the current status of managerial hubris literature that develops a more advanced understanding of what is known about hubris. We present a conceptual map that provides a comprehensive appreciation of hubris antecedents-symptoms-strategic choices-feedback performance main cause effect relationships. Our proposed conceptual map draws on the idea that managerial hubris is one of the determinants of CEO judgments, strategic choices, and organizational performance. We also show that managerial hubris has a good side and a bad side and identify the implications for strategy formulation and implementation. By doing so, the study not only provides a multidisciplinary introduction to hubris that is tailored to scholars, but also distills a suite of suggestions for managing hubris symptoms and traps that may prove valuable to practitioners.

Beyond friendly acquisitions: the case of REITs

Unlike operating companies, acquisitions between Real Estate Investment Trusts (REITs) are friendly and acquirers have been previously found to experience positive announcement effects. This study looks beyond stock response and long term performance and finds that overconfidence motivates REIT managers to acquire other firms or assets within the industry. We find that larger, more profitable, and less transparent REITs with fewer growth opportunities are more likely to become acquirers. We further find that top managers tend to personally buy more shares prior to the acquisition announcement and then sell more shares afterward. Our empirical evidence lends support to the hubris hypothesis.

Testing Hubris Hypothesis for Mergers in Pakistan: Using Event Study Technique

Hubris Hypothesis for mergers (Roll, 1986) is the benchmark for testing the effect of merger on the value of the firm. In this study, the Hubris Hypothesis has been tested for mergers in Pakistan by using the event study technique (MacKinlay, 1997). 42 events of mergers in Pakistani Stock Market during the period 2000-2012 have been considered for study purpose. The study concludes that the Average Abnormal Returns (AAR) tend to be positive in pre-merger period and negative in post-merger period but the Hubris Hypothesis does not sustain as true for mergers in Pakistan.

Impact of Merger and Acquisitions on Stock Returns: A Case of Financial Sector Firms of Pakistan

Mergers and acquisition are not only related to accounting measures of performance of firms but it also affects the wealth of shareholders either positively or negatively. According to Hubris hypothesis, the merger and acquisition announcement brings negative effect to shareholders wealth and decreases the abnormal return in post period. The present study took this analysis separate for long and short run period. To capture immediate effect on shareholders return study used Market Model to calculate abnormal returns and employed the t-test on it to check the significant differences in two sample data set. Out of 12 cases of M&A eight mergers showed negative abnormal returns for post period with statistical significance at 1% level, two at 5% and two acquiring firms reduced returns were not statistically significant. Overall on the basis of most of M&A results, the study concluded consistent results with earlier studies. The long run analysis employed by using Ohlson (1995) model for firm value with introducing dummy variable for the pre and post period. The results indicated coefficient of dummy for merger was -0.52 with statistical significance at 1% level which is demonstrating negative effect on share price which ultimately reduces the returns. The study concluded that merger and acquisition announcement bring negative effect on shareholders return either for short run or long time period.

A link between mergers and consumer confidence

Researchers have put forth several explanations as to why mergers underperform in the short-term horizon as well as over the long-term horizon. This study examines the relationship between consumer confidence and the success of mergers. The results show that high consumer confidence, as measured by the Michigan Consumer Sentiment Index, is statistically significant and negatively related to bidder firm average abnormal returns, providing evidence in support of the performance over-extrapolation hypothesis and the hubris hypothesis.

The Hubris Hypothesis: You Can Self‐Enhance, But You'd Better Not Show It

We tested whether and why observers dislike individuals who convey self-superiority through blatant social comparison (the hubris hypothesis). Participants read self-superiority claims ("I am better than others"; Experiments 1-7), noncomparative positive claims ("I am good"; Experiments 1-2, 4), self-equality claims ("I am as good as others"; Experiments 3-4, 6), temporally comparative self-superiority claims ("I am better than I used to be"; Experiment 5), other-superiority claims ("S/he is better than others"; Experiment 6), and self-superiority claims accompanied by persistent disclaimers (Experiment 7). They judged the claim and the claimant (Experiments 1-7) and made inferences about the claimant's self-view and view of others (Experiments 4-7) as well as the claimant's probable view of them (Experiment 7). Self-superiority claims elicited unfavorable evaluations relative to all other claims. Evaluation unfavorability was accounted for by the perception that the claimant implied a negative view of others (Experiments 4-6) and particularly of the observer (Experiment 7). Supporting the hubris hypothesis, participants disliked individuals who communicated self-superiority beliefs in an explicitly comparative manner. Self-superiority beliefs may provoke undesirable interpersonal consequences when they are explicitly communicated to others but not when they are disguised as noncomparative positive self-claims or self-improvement claims.

Impact of Biased Pecking Order Preferences on Firm Success in Real Business Cycles

Studies on behavioral corporate finance have documented that overconfident managers invest more than their more rational peers. Reasons include that overconfidence reduces managers’ ability to perceive risk correctly. However, although it has been addressed in several theoretical models, the impact of overconfidence on firm success has received little empirical examination. Based on a unique 10-year panel dataset of German chief executive officers (CEOs) and their companies, we investigate the relationship between overconfidence and firm success. In line with principal agent theory and the hubris hypothesis, we find negative effects of CEO overconfidence during economic recessions. However, we also find a strong positive impact of CEO overconfidence on firm profitability and stock market performance during the early phases of the business cycle. These novel insights imply that overconfidence operates using different mechanisms in routine than in one-time situations. In particular it hints at heightened individual effort and work performance of overconfident individuals as described in psychological studies. Our findings suggest a reciprocal relationship between macroeconomic developments and microeconomic decision-making, a finding that may help to illuminate aggregated patterns such as herding and investment bubbles and the current economic and financial crisis.

Fusionen und Übernahmen im Licht der Hybris – Überblick über den Forschungsstand

Although corporate acquisitions are ubiquitous a large number of M&A fails. One explanation for such failure is the hubris hypothesis for corporate takeovers. A decision maker affected with hubris (or overconfidence) will overestimate his abilities in raising potential synergies and is likely to make investment decisions destroying shareholder wealth. The growing literature on CEO hubris proposes various ways to measure hubris. We present these indicators and discuss possible advantages and drawbacks. (71 words)

Merger momentum and market valuations: the UK evidence

This study examines the effect of merger momentum on acquirer's returns both in the short and long-run. The focus is on high valuation markets and the source of momentum is investigated employing three different hypotheses: the neoclassical hypothesis, the hubris hypothesis and the investor sentiment theory. Evidence is provided that supports the investor sentiment (optimism) hypothesis since it is demonstrated that investors earn significant gains in the short run but returns are reversed in the long-run as initial expectations may not be fully met when combined firms’ accomplishments become known over time. The results are robust after controlling for several acquirer and deal characteristics.

Bidder returns and merger anticipation: Evidence from banking deregulation

This paper examines the anticipated components of bidder returns by focusing on the banking industry around the passage of interstate deregulation (Riegle Neal Act of 1994). Overall, firms that became bidders after Riegle Neal have large significant positive returns during its passage. Moreover, these positive wealth effects are significantly larger than the effects at the merger announcement. These results suggest that bidder returns are anticipated and focusing only on narrow event windows underestimates gains to bidders. Finally, the positive bidder returns appear to provide evidence against both the entrenchment and hubris hypotheses. Additional tests provide evidence to suggest that mergers are motivated by synergy rather than disciplinary motives.