Ceo Value Destruction in M&a Deals and Beyond

We extend the original work of Malmendier and Tate (2008) to cover the full spectrums of firm size, and a recent time period that includes the 1998-2001 merger wave. In particular, we explore the impact of target firm CEO overconfidence on firm M&A performance and the general impact of CEO overconfidence on firm long run post-M&A stock returns. We also examine the differential impact of CEO overconfidence on M&A decision making and performance in large and small firms. We work with a new measure of CEO overconfidence derived directly from CEO discourses in addition to option-exercise based proxy and CEO media portrayal measure. In parallel with Malmendier and Tate (2008), we find evidence that overconfident CEOs are more likely to conduct mergers and acquisitions than other CEOs and that the market reacts negatively to the announcement of an M&A deal by an overconfident CEO. In addition, we show that CEO overconfidence has a negative impact on firm long run post-M&A returns. Importantly, our results suggest that target firm CEO overconfidence equally negatively affects acquiring firm deal announcement returns, and this negative impact is strongest when both acquiring firm and target firm CEO overconfidence coexist concurrently, which may shed light on the overbidding problem. We also find that the positive link between CEO overconfidence and the likelihood of a deal is stronger, and the impact of CEO overconfidence on firm M&A performance is more negative, both on announcement and in the longer run in large firms than that in smaller firms as the opportunity for value destruction is greater. Finally, our results suggest that the impact of CEO overconfidence on firm M&A announcement and long run post-M&A performance is stronger during the recent merger wave, which provides an alternative explanation for the associated high levels of value destruction.