THE IMPACT OF MANAGERIAL OVERCONFIDENCE AND INVESTOR SENTIMENT ON BIDDERS’ ABNORMAL RETURNS

Abstract

The main objective of this thesis is to investigate takeover gains for UK bidding firms and offer a behavioural approach to empirical analysis. The main issues and key findings of the three empirical chapters are summarised as follows. Chapter 3 empirically investigates the hubris hypothesis for corporate takeovers (Roll (1986)). This thesis examines whether overconfident managers destroy shareholder value (in public deals) or whether their actions generally lead to lower wealth effects (in private deals) relative to rational bidders. Bidders’ short and long-term performance is also examined by employing, for the first time in a UK study, three different measures of overconfidence namely Stock Options, Multiple Acquirers and Business Press proxies. The results indicate that managers infected by hubris fail to generate superior returns than those generated by rational bidders, for all three proxies of overconfidence after controlling for various bidder and deal characteristics. We therefore argue that the well-documented destructive effect upon shareholder wealth of managerial overconfidence is not sensitive to the measure used for this behavioural bias (i.e. overconfidence). The Hubris hypothesis assumes a rational market-irrational manager framework while Shleifer and Vishny (2003) offer rational manager-irrational market framework and suggest that takeovers are driven by overvalued markets. Chapter 4 empirically investigates the proposal of Baker et al. (2007) who claims that ‘the irrational manager and irrational investor stories can certainly coexist’. Findings show that rational managers who announce takeovers in high valuation periods enjoy the highest abnormal returns while overconfident managers who announce takeover bids in low valuation periods cannot hide the poor quality or possible overpayment of their deals ending up suffering the highest losses. Lastly, Chapter 5 offers a behavioural approach to explain short –run bidder gains. Neoclassical theories suggest that the market reaction following the announcement of a takeover bid reflects either synergy or revaluation gains. Chapter 5 suggests that acquirers’ abnormal returns reflect a market overreaction. Results suggest that under conditions of low information uncertainty when investors do not possess private information, the market reaction is complete (zero abnormal returns) for any type of acquisition. On the other hand, under conditions of high information uncertainty, investors overweight their private information and overreact to takeover announcements. Therefore, they generate highly positive and significant gains following the announcement of private stock and public cash deals (considered to be ‘good’ news), positive gains following private cash acquisitions (also defined as ‘good’ news) while investors heavily punish public stock deals (classified as ‘bad’ news)