Bidder hubris and founder targets
January 2012
Research Paper
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Abstract. Managerial hubris can lead to overpayment for acquisitions for two non-mutually exclusive reasons: (i) the target’s stand-alone value under the bidder’s control is overestimated or (ii) synergies from the combined entity are overestimated. We provide a unique test of the first source of overpayment by isolating that portion of the target’s ex-ante value that is attributable to a founder CEO, and relating this to bidder abnormal returns. We document evidence of a significant founder CEO value effect in target firms and show that this founder effect is negatively correlated with bidder gains. This finding is not due to founder CEOs using their bargaining power to appropriate a larger share of the total acquisition gains. Rather, our findings are consistent with hubris-infected bidders underestimating the value of the founder’s firm-specific human capital (which is likely to undergo a significant decline after the acquisition), and consequently, overestimating the value of the target as a stand-alone firm under the bidder’s control.
- G30 : Corporate Finance and Governance: General
- G34 : Mergers; Acquisitions; Restructuring; Corporate Governance
- founder
- target
- bidder
- value
- founder ceo
- acquisition
- return
- sample
- founder hypothesis
- model
- result
- bidder gains
- hypothesis
- asset
- announcement
- capital
- non-founder
- bargaining power hypothesis
- book value
- measure
