A study of CEO's finds that many overestimate their own negotiating skills and overlook the element of luck in successful mergers, acquisitions, and other deals, according to the Management Insights feature in the current issue of Management Science, the flagship journal of the Institute for Operations Research and the Management Sciences (INFORMS®).
Management Insights , a regular feature of the journal, is a digest of important research in business, management, operations research, and management science. It appears in every issue of the monthly journal.
"Are Overconfident CEOs Born or Made? Evidence of Self-Attribution Bias from Frequent Acquirers" is by Matthew T. Billett and Yiming Qian of the University of Iowa.
Whether to engage in mergers and acquisitions is one of the most important decisions top managers make, the authors write. 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.
Professors Billett and Zian based their results on a sample of public acquisitions between 1985 and 2002. Over this period, U.S. public companies acquired $3.7 trillion worth of other U.S. public companies.
The current issue of Management Insights is available at http://mansci.journal.informs.org/cgi/reprint/54/6/iv . The full papers associated with the Insights are available to Management Science subscribers. Individual papers can be purchased at http://institutions.informs.org . Additional issues of Management Insights can be accessed at http://www.informs.org/site/ManSci/index.php?c=11&kat=Management+Insights .
The other Insights in the current issue are:
INFORMS journals are strongly cited in Journal Citation Reports, an industry source. In the JCR subject category "operations research and management science," Management Science ranked in the top 10 along with two other INFORMS journals.
The special MBA issue published by Business Week includes Management Science and two other INFORMS journals in its list of 20 top academic journals that are used to evaluate business school programs. Financial Times includes Management Science and four other INFORMS journals in its list of academic journals used to evaluate MBA programs.
About INFORMS
The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with 10,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, financial engineering, and telecommunications. The INFORMS website is www.informs.org . More information about operations research is at www.scienceofbetter.org .
Management Science