The blind power: Power-led CEO overconfidence and M&A decision making

Abstract

The behavioral finance literature attributes failed M&As to CEO overconfidence. We investigate the source of CEO overconfidence that leads to failed M&As. Among various determinants of CEO overconfidence, we propose that power-led CEO overconfidence delivers undesirable consequences in corporate investments. Using CEO-level data, we find that CEO power increases the probability of a CEO being overconfident. We also show that power-led overconfident CEOs tend to complete more deals regardless of economic circumstances, do stock acquisitions, and make diversifying acquisitions, relative to non-overconfident CEOs. The results suggest that the findings of previous studies on M&As by overconfident CEOs could be driven by power-led overconfident CEOs.