Bidder hubris and founder targets

Abstract
Overpayment for acquisitions can occur if managerial hubris leads bidders to overestimate target standalone values under their control. We provide a unique test of this phenomenon by analyzing whether bidders overpay for founder CEO targets because they overestimate their ability to replicate the value of the founder CEOs’ firm-specific human capital post-acquisition. We show that the founder CEOs’ human capital is valuable and embedded in the ex-ante targets’ value and is, economically and statistically, negatively associated with bidder gains and synergy returns. Our findings are consistent with bidders’ overestimating the value of founder CEO targets as stand-alone firms under their control.
[version: December 2013]