Are overconfident CEOs born or made? Evidence of self-attribution bias from frequent acquirers. (2008)

“Many CEOs overestimate their own negotiating skills and overlook the element of luck in successful mergers, acquisitions, and other deals. CEOs appear to overly attribute their role in successful deals, leading to more deals even though these subsequent deals are value destructive.

Billet, M. & Qian, Y., University of Iowa
Management Science 54(6): 1037-1051.

Many CEOs overestimate their own negotiating skills and overlook the element of luck in successful mergers, acquisitions, and other deals, according to the authors.

Whether to engage in mergers and acquisitions is one of the most important decisions top managers make. While many of the factors influencing these decisions may be based on objective financial metrics, there is increasing evidence that behavioral biases play an important role in managerial decision making. The authors explore one such bias–managerial overconfidence– and find evidence suggesting CEOs develop overconfidence through ‘self-attribution bias’ when making merger and acquisition decisions. Individuals subject to self-attribution bias overcredit their role in bringing about good outcomes and underestimate the role of luck.

Consistent with this, they find that CEOs appear to overly attribute their role in successful deals, leading to more deals even though these subsequent deals are value destructive.

They also find evidence that CEOs alter their stock holdings prior to deals in a pattern consistent with overconfidence in the outcome of these subsequent deals.

The authors advise that CEOs be particularly cautious and disciplined when engaging in acquisitions following prior success. Boards and other stakeholders should also ensure that any proposed deal is judged on its own merits and is not justified on the basis of prior CEO success in mergers and acquisitions, they say.

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