Exploring Chief Executive Officer Overconfidence and Merger and Acquisition Deal Characteristics
Résumé
Purpose: Research shows that mergers and acquisitions (M&As) often fail, prompting interest in causes such as overconfident boards and chief executive officers (CEOs). Evidence from developed markets on CEO overconfidence and M&A deal characteristics is mixed. Relationships between CEO overconfidence and four deal characteristics (rationale, size, financing, and number of deals completed) were examined using data from 119 deals undertaken by South African listed companies between 2016 and 2023. South Africa has an active, regulated M&A market, boasting substantial domestic and foreign investor participation. Methodology: CEO overconfidence was measured using the conventional Longholder measure and a novel proxy called the Receptiviti overconfidence measure. Data were collected from Bloomberg, the acquirers’ annual integrated reports, the South Africa Competition Commission, and other credible online sources. Findings: Contrary to expectations, logistic and cross-sectional regressions reveal that overconfident CEOs preferred non-diversifying acquisitions. They also completed significantly more deals during their tenure than their non-overconfident peers did. The agency and upper echelon theories explain the findings and provide insights for stakeholders. Practical Implications: For serial acquirers, effective monitoring by truly independent non-executive directors is crucial to ensuring that CEO-driven acquisitions contribute to long-term value creation rather than empire-building. The incentive compensation of serial acquirers should be based on deal completion and long-term performance rather than short-term performance metrics.
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