When Overconfident CEOs Deliver Higher Returns: Evidence From Acquisition Waves

Abstract

Overconfident CEOs are frequently criticized for making value-destroying corporate acquisitions in which they acquire excessively and overpay for their acquisitions. By contrast, we argue that overconfident CEOs can deliver higher returns in acquisition waves because the motivation and the requirement for action speed that occur in acquisition waves are different from other acquisition contexts. Specifically, we hypothesize and find that overconfident CEOs are more likely to capture preemption opportunities by acting earlier in acquisition waves, and such rapid moves enable overconfident CEOs to achieve higher acquisition returns. In addition, drawing upon organizational learning research, we hypothesize and find that in acquisition waves, pre-wave experience with large and related acquisitions facilitates overconfident CEOs to pursue acquisitions even more quickly during acquisition waves, which further enhances acquisition returns. Contributions to the acquisitions and CEO overconfidence literatures are discussed.