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The Blind Power: Power-Driven CEO Overconfidence and M&A Decision Making

  • Hyoseok (David) Hwang Assistant Professor of Finance in the Rutgers School of Business at Camden, NJ
  • Hyun-Dong Kim Assistant Professor of International Finance in the Graduate School of International Studies at Sogang University in Seoul 04107, South Korea
  • Taeyeon Kim PhD student in the college of Business at Korea Advanced Institute of Science and Technology(KAIST) in Seoul 02455, South Korea
The behavioral finance literature attributes failed M&As to CEO overconfidence. We investigate the source of CEO overconfidence that leads to failed M&As. Among various determinants of CEO overconfidence, we propose that power-led CEO overconfidence delivers undesirable consequences in corporate investments. Using CEO-level data, we find that CEO power increases the probability of a CEO being overconfident.We also show that power-driven overconfident CEOs tend to complete more deals regardless of circumstances, do stock acquisitions, and make value-destroying acquisitions, relative to nonoverconfident CEOs. The results suggest that previous studies on M&As by overconfident CEOs are mainly led by power-driven overconfident CEOs.

  • Hyoseok (David) Hwang
  • Hyun-Dong Kim
  • Taeyeon Kim
The behavioral finance literature attributes failed M&As to CEO overconfidence. We investigate the source of CEO overconfidence that leads to failed M&As. Among various determinants of CEO overconfidence, we propose that power-led CEO overconfidence delivers undesirable consequences in corporate investments. Using CEO-level data, we find that CEO power increases the probability of a CEO being overconfident.We also show that power-driven overconfident CEOs tend to complete more deals regardless of circumstances, do stock acquisitions, and make value-destroying acquisitions, relative to nonoverconfident CEOs. The results suggest that previous studies on M&As by overconfident CEOs are mainly led by power-driven overconfident CEOs.
CEO Overconfidence,CEO Power,Mergers and Acquisitions