Content area
Full Text
This study examines the role of a chief executive officer's hubris, or exaggerated self-confidence, in explaining the large size of some premiums paid for acquisitions. In a sample of 106 large acquisitions, we found that four indicators of CEO hubris are highly associated with the size of premiums paid: the acquiring company's recent performance, recent media praise for the CEO, a measure of the CEO's self-importance, and a composite factor of these three variables. The relationship between CEO hubris and premiums is further strengthened when board vigilance is lacking-when the board has a high proportion of inside directors and when the CEO is also the board chair. On average, we found losses in acquiring firms' shareholder wealth following an acquisition, and the greater the CEO hubris and acquisition premiums, the greater the shareholder losses. Thus, CEO hubris has substantial practical consequences, in addition to having potentially great theoretical significance to observers of strategic behavior.
The famed investor, Warren Buffett, once said that many corporate acquirors think of themselves as beautiful princesses, sure that their kisses can turn toads into handsome princes. The acquirors pay substantial premiums over market value, believing that they can release the imprisoned princes. But, as Buffett said, "We've observed many kisses but very few miracles" (1981 Berkshire Hathaway Annual Report).1 With acquirors making record numbers of takeovers at prices far above market levels, the comment Buffett made in 1981 has not lost its relevance for managers and students of organizations today. In fact, more acquisitions were announced in 1995 than in any prior calendar year. And between 1976 and 1990, 35,000 corporate acquisitions were completed in America, with a combined value of $2.6 trillion (Jensen, 1993). Yet, for all this activity, executives of acquiring companies generally fail to effect acquisition miracles. Acquisitions sometimes yield positive returns for acquirors (Lubatkin, 1987), but generally acquisitions have been found to have a neutral to negative effect on the shareholder wealth of acquiring firms (Bradley, Desai, and Kim, 1988; Jarrell, Brickley, and Netter, 1988; Berkovitch and Narayanan, 1993). Commonly, investors mark down the stock of acquirors following takeover announcements, indicating their belief that acquiring managers have overpaid (Shleifer and Vishny, 1991). This adverse market reaction is reinforced by findings that acquisitions lead to declines in...