Overconfident CEOs underestimate role of luck in mergers, acquisitions

Washington, June 12 : A new study on CEOs has found that many of them are overconfident about their own negotiating skills and overlook the element of luck in successful mergers, acquisitions, and other deals.

Authored by Matthew T. Billett and Yiming Qian of the University of Iowa, the study, entitled "Are Overconfident CEOs Born or Made? Evidence of Self-Attribution Bias from Frequent Acquirers," discusses how behavioural biases control how CEOs take important managerial decisions.

The authors said that one of the most important decisions top managers have to make is whether they want to go ahead with mergers and acquisitions. And this decision is mainly based on financial metrics. However, they said that there is an increasing body of evidence that behavioural biases play an important role in managerial decision-making.

Professors Billett and Zian based their results on a sample of public acquisitions between 1985 and 2002.

In their study, they focussed on one such bias-managerial overconfidence-and found evidence suggesting that CEOs develop overconfidence through 'self-attribution bias' when making merger and acquisition decisions.

Usually, those subject to self-attribution bias overcredit their role in bringing about good outcomes and underestimate the role of luck.

Another finding which was consistent with this was that CEOs seems to overly attribute their role in successful deals, which makes them go for more deals even though these subsequent deals are value destructive.

Evidence was also found that CEOs alter their stock holdings prior to deals in a pattern consistent with overconfidence in the outcome of these subsequent deals.

However, the authors advised that CEOs should be particularly alert and disciplined while dealing with acquisitions following prior success.

Also, Boards and other stakeholders should make certain that any proposed deal is evaluated on its own merits and not on the basis of prior CEO success in mergers and acquisitions.

The study appears in the Management Insights feature in the current issue of Management Science, the flagship journal of the Institute for Operations Research and the Management Sciences (INFORMS).

ANI