Article2003

What Is the Price of Hubris? Using Takeover Battles to Infer Overpayments and Synergies

Pekka T. Hietala · Steven Neil Kaplan · David T. Robinson

139 citations0/0 files storedFinancial Management

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Corporate Finance and Governance Financial Markets and Investment Strategies Merger and Competition Analysis

Abstract

We present a framework for determining the information that can be extracted from stock prices around takeover contests.In only two types of cases is it theoretically possible to use stock price movements to infer bidder overpayment and relative synergies.The takeover contest for Paramount in 1994 illustrates one of these generic cases.We estimate that Viacom, the "winning" bidder, overpaid for Paramount by more than $2 billion.This occurred despite the fact that Viacom's CEO owned roughly 3/4 of Viacom.These results are consistent with managerial overconfidence and/or large private benefits, but not with the traditional agency-based incentive problem.

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References

1983Separation of Ownership and Control 1996Theory of the firm; managerial Behavior, Agency Costs, and Ownership Structure 1986The Hubris Hypothesis of Corporate Takeovers 1980Takeover Bids, The Free-Rider Problem, and the Theory of the Corporation 2001New Evidence and Perspectives on Mergers 1988Managerial control of voting rights 2002What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions 1988Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms

Cited by

2014The Origin of Failure: A Multidisciplinary Appraisal of the Hubris Hypothesis and Proposed Research Agenda 2007The Positive Effects of Biased Self-Perceptions in Firms 2007Behavioral Corporate Finance**The authors are grateful to Heitor Almeida, Nick Barberis, Zahi Ben-David, Espen Eckbo, Xavier Gabaix, Dirk Hackbarth, Dirk Jenter, Augustin Landier, Alexander Ljungqvist, Ulrike Malmendier, Jay Ritter, David Robinson, Hersh Shefrin, Andrei Shleifer, Meir Statman, Theo Vermaelen, Ivo Welch, and Jeffrey Zweibel for helpful comments. Baker and Ruback gratefully acknowledge financial support from the Division of Research of the Harvard Business School.2013Executive hubris: the case of a bank CEO

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