Do Overconfident CEOs Ignore Toehold Strategies?

Research output: Contribution to conferencePaperAcademic

Abstract

In a toehold strategy, an acquirer buys a minority stake with the intention to gain control of a target later. Yet despite the claimed advantages toehold strategies offer, acquirers only rarely buy toeholds. This study presents a behavioural dynamic model and empirical evidence, showing that overconfidence of CEOs causes them to forgo the more prudent toehold strategy to make immediate controlling acquisitions instead. We find a negative relation between the likelihood of acquiring a minority stake and CEO overconfidence, revealed through measures based on the timing of their option portfolio and on external perception. Overconfident CEOs also purchase on average larger fractions of their targets. Furthermore, the acquirer returns on toehold announcements tend to be higher than majority stake acquisitions. We conclude that CEO overconfidence causes acquirers to forgo minority stake acquisitions, despite the advantages of minority stakes versus controlling acquisitions.
Original languageEnglish
Number of pages41
Publication statusIn preparation - 2020
EventThe Annual International Conference on
Real Options, Corporate Finance, Innovation and Strategy
- Boston, United States
Duration: 29 Jun 20171 Jul 2017
https://www.realoptions.org/abstracts2017.html

Conference

ConferenceThe Annual International Conference on
Real Options, Corporate Finance, Innovation and Strategy
Country/TerritoryUnited States
CityBoston
Period29/06/171/07/17
Internet address

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