經理人過度自信於經濟衰退時對企業併購之影響 - 政大學術集成

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(1)國立政治大學財務管理研究所碩士學位論文. 經理人過度自信於經濟衰退時對企業併購之影響 The Impact of CEO Overconfidence 治on Mergers & Acquisitions. 政. 大. during 立 Economic Recession. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 指導教授：陳嬿如博士研究生：張暘亘撰. 中華民國一○七年二月.

(2) 謝辭撰寫論文是目前我所經歷過最漫長同時也最充實的學期旅程，很感激能夠在研究所經歷這段旅程。轉眼這個旅程也將走到終點，而這過程中家人朋友以及老師的支持及幫助是讓我完成這學習旅程不可或缺的重要因素。首先，我要謝謝陳佰弦同學在我幾乎是獨立撰寫論文的半年期間不斷地接受我的提問、幫助我記錄研究進度、和我討論論文的邏輯並教導我實證設計的方法，讓我撰寫的過程變得順利並感受到精神上的支持。同時我也要謝謝林佳賢學姊運用的妳豐富學術知識以及清晰的邏輯幫助我在撰寫論文的過程中釐清許多觀念，我從中獲益良多。另外，我也要感謝同門的吳一炬、. 政治大. 黃雅雯你們在這過程中不時接受我的提問並且不斷給予我鼓勵。謝謝你們，祝你們在. 立. 未來都能闖出一片天。. ‧ 國. 學. 在這半年的過程中，我非常感謝我的父母以及哥哥，在背後不斷給予我支持。你. ‧. 們總是打點好我的食宿，讓我無後顧之憂地將心力完全放在撰寫論文上，同時也傾聽我在過程中所遇到的煩惱，讓我得以繼續前進，對你們只有無盡的感謝。. sit. y. Nat. io. al. er. 最後，我要謝謝指導老師陳嬿如教授。很感謝您在當初給我機會，願意讓我進入您的門下學習，就算知道我必須因為交換而延畢一學期，您還是非常有耐心的教導. n. v i n Ch 我。撰寫論文期間，除了向陳老師學習邏輯的思考以及財務知識，更重要的是陳老師 engchi U 總是點出我長期以來不斷忽視自身的問題，並且給予我機會不斷的去挑戰自己的極限，使我在磨練中成長茁壯，成為您的學生是我在研究所最大的收穫，謝謝您的諄諄教誨。.

(3) 摘要本研究探討過度自信經理人於經濟衰退階段時之併購行為。本研究蒐集 S&P1500 大企業於 1993 年至 2016 年的資料，對過度自信經理人於景氣衰退階段的併購機率、宣告效果、長期股價表現進行分析。因為過度自信經理人低估景氣衰退所造成的高度不確定性，同時高估本身能夠透過併購所創造的公司價值，我們預期過度自信經理人相較非過度自信經理人更容易在景氣衰退的階段進行併購。然而實證結果過顯示過度自信經理人的併購機率於 2008 年金融海嘯後大幅下降，減少併購的幅度顯著高於非過度自信經理人。此結果和過去文獻一致，說明在財務資源不足的情況下，過度自信經理人會比非過度自信經理人更不願意投資。因為過度自信經理人高估自家公司權益價值，認為資本市場低估其權益價值，就算面對能為公司創造價值的投資案時也不願意向外發行股票籌資，. 政治大關鍵字：經理人過度自信、經濟衰退、企業併購立. 因而導致他們在經氣衰退時較非過度自信經理人投資更保守。. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 3. i n U. v.

(4) Abstract The study examines the behaviors of overconfident CEOs during recessions using firms included in S&P 1500 Index from 1993 to 2016. We propose that overconfident CEOs would undertake more M&As than non-overconfident CEOs during recessions for their biased beliefs lead them to underestimating the risk they would incur in recessions and overestimating the synergy they can create through M&As. However, we found that, during and after the 2008 Recessions, overconfident CEOs reduce significantly more in undertaking M&As than nonoverconfident CEOs. The results are consistent with past literatures and suggest that decrease in financial resources caused by recession lead overconfident CEOs, who overestimate the value of their own equity and are unwilling to issue new equity, to reducing more in undertaking. 政治大 Keywords: CEO Overconfidence, Economic Recession, Mergers & Acquisitions 立 M&As than non-overconfident CEOs after and during recession.. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 4. i n U. v.

(5) Contents 1. Introduction ....................................................................................................................................... 1 2. Literature Review and Hypothesis .................................................................................................. 3 2.1 Literature Review ....................................................................................................................... 3 2.1.1 Determinants of Mergers and Acquisitions ....................................................................... 3 2.1.2 CEO Overconfidence ........................................................................................................... 4 2.1.3 Recession and M&As ........................................................................................................... 6 2.2 Hypothesis.................................................................................................................................... 7. 治政 2.2.2 Announcement Effect and Long-term Performance 大........................................................ 9 立 3. Empirical Analysis .......................................................................................................................... 10 2.2.1 Probability of Bidding ......................................................................................................... 7. ‧ 國. 學. 3.1 Data ............................................................................................................................................ 10 3.2 CEO Overconfidence ................................................................................................................ 10. ‧. 3.3 Recession Years ......................................................................................................................... 12. Nat. sit. y. 3.4 Probability of Bidding .............................................................................................................. 13. er. io. 3.5 Announcement Effect ............................................................................................................... 14. al. v i n Ch 4. Empirical Results ............................................................................................................................ 17 engchi U n. 3.6 Long-term Performance ........................................................................................................... 15. 4.1 Probability of Bidding .............................................................................................................. 17 4.2 Announcement Effect ............................................................................................................... 21 4.3 Long-term Performance ........................................................................................................... 23. 5. Conclusion ....................................................................................................................................... 25 References ............................................................................................................................................ 26 Appendix: Variable Definitions ......................................................................................................... 51. 5.

(6) List of figures Figure 1 ................................................................................................................................... 30. List of tables Table 1 Recession Years ......................................................................................................... 31 Table 2 Summary Statistics ................................................................................................... 32 Table 3 Statistics of Overconfident CEOs ............................................................................ 33 Table 4 Results of Regression of Probability of Bidding .................................................... 34 Table 5 Statistics of CAR ....................................................................................................... 40 Table 6 Results of Regression of Announcement Effect ..................................................... 41 Table 7 Statistics of BHAR .................................................................................................... 47 Table 8 Results of Regression of Long-run Performance ................................................... 48. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 6. i n U. v.

(7) 1. Introduction Past literatures show that M&A activities do not appear evenly along time but cluster in specific periods (Harford, 2005; Martynova and Renneboog, 2008). There are many explanations for clustering of M&A activities for the whole economy such as change in investment opportunities (Mitchell and Mulherin, 1996; Harford, 2005), capital market conditions (Shleifer and Vishny, 2003; Rhodes-Kropf and Vismanathan, 2004), uncertainty (Bhagwat, Dam, and Harford, 2016), and so forth. Conclusion from past literatures shows that macroeconomic conditions, especially business cycles, are the dominant factors affecting the clustering of M&A activities (Becketti, 1986; Bhagwat, Dam, and Harford, 2016). Besides academic literatures, statistical data of M&As also exhibits that business cycle plays an. 政治大 M&A deals in the U.S. of our sample are procyclical with business cycle, which increase during 立. important role in determining M&A activities. As shown in Figure 1, the number and value of expansion and decrease significantly during recessions. For example, in 2001, one year after. ‧ 國. 學. the eruption of Dot Com Bubble, total value of M&A deals falls from the previous year’s $179 billion to $74 billion, which is 58.6% decline in a year. Similarly, M&A deals number falls. ‧. from 231 to 124 during the 2008, 2009 financial crisis. These numbers imply that it might not. y. Nat. be a good time for firms to undertake M&As during recessions. The economic rationale behind. sit. this phenomenon includes decrease in product demand (Kahle and Stulz, 2013) and increase in. n. al. and increase the risk a firm would bear to complete a deal.. Ch. engchi. er. io. uncertainty (Bloom, 2012; Schwert, 1989), which would reduce the synergies a firm can create. i n U. v. However, despite the fore-mentioned obstacles that prevent firms from conducting M&As during recessions, we still witness some firms completing transactions with noticeable deal value that draw our attention. For example, during 2001 recession, Hewlett-Packard, which was in the center of the shock, decided to merger with its rival, Compaq for $25 billion in stocks. Also, during the 2008 financial crisis, the Swiss pharmaceutical giant Roche made an offer to buy the biotech company, Genetech for $43.7 billion and Verizon offered to buy the cellular phone provider, Alltel for $6 billion in cash and bear the additional $22 billion debt. We can’t reject the possibility that some M&A deals during recession was made to capture synergies. However, it could also be other important factors to drive firms to make the deal especially when the time is bad and the economic situation is unfavorable for firms to do so. We propose that it could be CEO’s overconfidence that drive firms to undertake M&As during recessions. 1.

(8) Because overconfidence leads CEOs to underestimating the risk they face and overestimating the likelihood of better outcomes when considering investment project (Malmendier and Tate, 2005; Goel and Thakor, 2008), overconfident CEOs are more likely to pursue M&As despite the environment make it difficult to do so. When it comes to managerial behavior on M&As, one might argue that it is agency problem of overinvestment that induce CEOs to undertake M&As during recessions rather than overconfidence as long as they can derive private benefit from the deal. However, according to past literatures, we first exclude the possibility that agency problem plays a main role for firm to conduct M&As during recession. Bates (2009) show that the degree of agency problem in the U.S. firms have decline with the increase of idiosyncratic risk since 1980. Complemented by Bloom (2012) and Panousi and Papanikolaou (2012), who mention that market volatility rise sharply during. 政治大. recessions, we are convinced that it is unlikely for agency problem to explain the M&As during. 立. recessions.. ‧ 國. 學. The important of this study is that it can help clarify the effect of overconfidence on M&As. Generally, there are two strands of literature studying managerial behaviors’ effect on M&As,. ‧. which are agency problem of overinvestment and CEO overconfidence. First, agency problem arise from the separate of principal (shareholders in our case) and agent (CEOs in our case).. y. Nat. sit. The interest of shareholders and CEOs are not necessarily consistent. Under this scenario, some. er. io. CEOs might pursue their personal interest rather than maximize shareholder’s value (Jensen. al. and Meckling, 1976) and overinvest (Jensen, 1986). On the other hand, literatures studying. n. v i n CEO overconfidence assume that C overconfident CEOs are acting in the best interest of hengchi U shareholders to maximize current shareholders’ value and are free from agency problem. (Malmendier, 2005, 2008). It is their underestimation of the risk and overestimation the likelihood of good outcomes or being irrationally optimistic that distort their investment decision. However, both strands of literatures find similar results. For instance, Jensen (1986), Harford (1999), and Richardson (2006) show that CEOs with higher free cash flows, which proxy for the discretion power and agency problem, are more likely to undertake M&As and the M&As are mostly value-decreasing. At the same time, Roll (1986), Doukas and Petmezas (2007), Malmendier and Tate (2008), and Billett and Qian (2008) find that CEOs with overconfidence are more acquisitive and the M&A by which they undertake have negative announcement returns. This results in ambiguity when we studying the effect of managerial 2.

(9) behavior on M&A activities. Hence, we try to adapt exogenous condition that would screen one of the managerial behavior out so that we can focus on the other. Recessions, as we explained earlier, can serve as an idea condition for us to study the effect of CEO overconfidence on M&A activities for it lower the possibility of agency problem. We find that overconfident CEOs reduce significantly more in undertaking M&As than non-overconfident CEOs after the 2008 Recession. The effect is more significant for firms with low level of financial constraint and medium level of excess cash holdings. Our results show that, due to decrease in financial resources and unwillingness to access fund from capital market, overconfident CEOs cut back more in undertaking M&As after 2008 Recession. This is consistent with Malmendier and Tate (2005, 2008), who evidence that overconfident CEOs’. 政治大. investment decisions are more sensitive to change in financial resources than nonoverconfident CEOs.. 立. ‧ 國. 學. 2. Literature Review and Hypothesis 2.1 Literature Review. ‧. 2.1.1 Determinants of Mergers and Acquisitions. Nat. sit. y. According to past literatures, the determination of M&A can be classified into three levels,. er. io. which are external, internal, and managerial characteristic. First, external factors include environmental uncertainty such as instability of politics (Xu, 2017; Gulen and Ion, 2016; Rossi. n. al. Ch. i n U. v. and Volpin, 2004) and market volatility (Bhagwat, Dam, and Harford, 2016). For example,. engchi. Gulen (2016), who use news-based index to measure policy uncertainty shows that corporate’s investment level is negatively related to policy uncertainty and the phenomenon is concentrate in investments having high irreversibility. Bhagwat et al. (2016) posits that increases in market volatility decrease subsequent deal activity, especially for public targets. Second, industry shock is another well documented factors that would drive firm to undertake M&As. This strand of literatures can be tracked back to Mitchell and Mulherin (1996), who shows that industry shocks such as changes in input costs, government policy (deregulation), and innovations in technology, which can induce firms affected by the shocks to undertake M&As in respond to the change in industry structure. Later literatures such as Maksimovic (2001, 2013), Andrade (2004), and Rousseau (2002) suggest that M&As are more likely to occur when there are more investment opportunities. In most cases, it is firms with higher productivity that 3.

(10) buy firms with less productivity, which represents the efficient allocation of resources. Third, capital market also plays an important role that determine firms’ M&A decisions. Harford (2005) evidences that industry shock alone is not enough to cause merger waves but with the help of sufficient capital liquidity. Also, Shleifer and Vishny (2003) and Rhodes‐Kropf and Viswanathan (2004) suggest that high stock market valuation would stimulate firms to undertake M&As for firms can use overvalued stock to purchase firms with relative low stock price in order to reduce the cost of purchase. After considering the external factors, it is firm’s internal resources that determine firm’s responding strategy and the M&A decisions. First, firm’s organization characteristic such as organizational ability and social network would enhance firm’s willingness and ability to make. 治政大 connections are more likely to For example, Ferris et al. (2016) find that bidders with political 立 acquire targets and avoid regulatory delay or denial. At the same time, Maksimovic and Philips and complete the bid (Maksimovic and Philips, 2002; Ferris, Houston, and Javakhadze, 2016).. ‧ 國. 學. (2002) show that organization with comparative advantage of using some specific assets is prone be the bidder. On the other hand, financial feasibility is another main determination for. ‧. firms to undertake M&As. If firms have abundant internal fund including free cash flow and cash holdings, they are more likely to conduct M&As (Harford, 1999). Besides, the ability to. y. Nat. n. al. er. io. 2014).. sit. access to capital market also make it easier for firms to make an M&A offer (Harford and Uysal,. i n U. v. Finally, managerial characteristics, also play an important role in determining firms’. Ch. engchi. M&As decisions (Jensen and Meckling, 1976; Jensen, 1986; Harford, 1999; Roll, 1986; Malmendier and Tate, 2005, 2008; Doukas and Petemezas, 2007). The main focus of our study is CEO overconfidence. To be detailed, we discuss it in below section. 2.1.2 CEO Overconfidence First, overconfidence is one of the most prevailing and wide discussed behavioral biases that exist. Early research on this topic mainly came from psychology. Tversky (1995) and Griffin and Brenner (2004) provide us with some theoretical foundation of overconfidence by summarizing the factors that would result in overconfidence, which include illusion of control, self-enhancement tendencies, better than average effect, unrealistic optimism, insensitivity to predictive accuracy, and misconceptions of chance processes. Those factors would cause CEOs to underestimate the risk they are facing or overestimate the likelihood of good outcomes. 4.

(11) When it comes to corporate finance studies, it is Roll (1986) that first link overconfidence to firm investment decision makings. In his paper, Roll propose that hubris is one of the main rationale for firms to make M&As and hubris can lead CEOs to overpay on targets. This imply that overconfidence is a trait which is detrimental to firm value. Building on Roll (1986) and Heaton (2002), who argue that overconfident CEOs believe that capital markets undervalue their securities, Malmendier and Tate (2005) find evidence that overconfident CEOs are more prone to overinvest than non-overconfident CEOs when they have enough internal resources and eventually their investment decisions may destruct firm value. Furthermore, Malmendier and Tate (2008) provide evidence that overconfident CEOs with abundant internal resources are more acquisitive and market reaction toward those M&As are significantly negative. Similarly, Doukas and Petmezas (2007) and Billett and Qian (2008) find that CEOs attribute. 政治大 conclude that, in some cases, overconfident would lead to value-decreasing M&As. So firms 立. the success of M&As are tend to undertake more M&As. From fore-mentioned literatures, we. ‧ 國. 學. and boards should take actions to mitigate negative effect of overconfident managers.. Despite the negative effect mentioned above, there is also bright side of overconfident. ‧. CEOs which can benefit firm value. Because CEOs are under-diversified comparing to shareholders for that their human capital are tied to the firm. Sometimes they are unwilling to. y. Nat. sit. take the risk that is necessary for firms to increase value. In the cases of overconfident CEOs,. er. io. however, they are more willing to take those risk for they underestimate the risk they are. al. bearing, which can lead to value-increasing for shareholders. Building on this concept, Goel. n. v i n and Thakor (2008) propose that the relationship between firm value and CEO’s overconfidence Ch U i e h n c g is non-monotonic. That is to say, slightly overconfident CEOs can enhance firm value, and when their degree of overconfident exceed some point, they are going to make valuedecreasing investment. Similarly, Gervais, Heaton, and Odean (2011) claim that firms can take advantage of CEO’s overconfidence. Because overconfident CEOs not only are more willing to take the required risk, but they also exert more effort to gather information when evaluating investment project, which can raise the success rate and value of the project. When dealing with mildly overconfident CEOs, firms can increase value by reducing the convexity of CEOs’ compensation because it require less performance based compensation to realign their interest to take risky project. On the other hand, firm can take advantage of excessive overconfident CEOs by giving them highly convex compensations for arbitraging their excessive believe that their decisions would lead top good outcome. Finally, the phenomenon of value-decreasing 5.

(12) investment caused by overconfident are due to inappropriate contracting with overconfident CEOs. Adding industry type and life cycle to overconfident context, Hirshleifer, Low, and Theo (2012) showed that overconfident CEOs were more likely to increase firm value when they worked in innovative industries. They explained that overconfident CEOs can exploit the high growth opportunities by conducting internal innovation project. When working in industries which lacked growth opportunities, however, overconfident CEOs had to seek growth from external and they may overestimate their ability to create value for firms. Thus, they engaged in acquisitions which are detrimental to firm value. 2.1.3 Recession and M&As There are several explanations for decrease in M&A activity during recessions. First,. 政治大 it more difficult for firms to conduct 立 M&As. For example, Bloom (2012), Panousi (2012), and. market volatility and uncertainty would increase significantly during recessions, which make. ‧ 國. 學. Schwert (1989) all point out that market volatility rise sharply during recessions. And in respond to the increased volatility, firms tend to reduce or pause their investment because the. real options of investment would increase during recessions, which make it optimal to wait. ‧. after the economy start to recover (Bloom, 2009; Bernanke, 1983). Also, Bhagwat et al. (2016),. y. Nat. who measure market uncertainty by VIX, evidence that M&A activities decrease in recessions. er. io. sit. is mainly due to increase in underlying volatility of market price of target.. al. Second, partly due to increase in uncertainty, the contraction in bank lending and credit. n. v i n supply during recessions would reduce C hfirms’ accessibilityUto necessary funds to complete the e many h i banks incurred huge loss. In order to g clarge deal. For example, in 2008 financial crisis, n maintain the required capital ratio, banks must sell assets or raise capital. And they have to limit their making of new loans, which cause the eventual bank credit contraction (Brunnermeier, 2009). Ivashina and Scharfstein (2010) also indicate that syndicated lending declined and credit line was drew down during the 2008 Financial crisis, which give support for the theory. On the other hand, extremely high level of uncertainty would reduce the credit supply. Gorton (2010) show that investors find that bonds were thought to be safe had become risky during the financial crisis. As a result, there is a flight to quality in that situation, which increases the cost of capital and makes it very difficult to borrow money from the market (Caballero and Krishnamurthy, 2008). With reduce in credit supply, it would be harder for firms to make investment. Moreover, Becketti (1986) shows that increased interest rate during 6.

(13) recessions would reduce M&A activity. According to Braun and Larrain (2005) and Campello, Gramham, and Harvey (2010), firms with financial constraints cut more on capital expenditure during recessions. Without the ability to access external finance, many firms bypass attractive investment opportunities. Third, it is decrease in investment opportunities and decline in synergies that prohibit firms from undertaking M&As in recessions. According to Kahle and Stulz (2013), during recessions, household’ wealth (real estate, stocks) would decrease, which induce them to reduce their consumption, and as a result, reduce the overall market demand. With decrease in demand, there would be fewer investment opportunities. In addition, Lambrecht (2004) proposes that the timing of mergers is linked to economies of scale and merger synergies increase with product market demand, which would increase during expansions and decrease during recessions.. 立. 學. ‧ 國. 2.2 Hypothesis. 政治大. 2.2.1 Probability of Bidding. ‧. Previous literature have emphasized the impact of uncertainty on investment (McDonald and Siegel, 1986; Dixit and Pindyck, 1994; Bloom, 2009). For example, Bhagwat et al. (2016). y. Nat. sit. show that macroeconomic shocks play an important role when determining M&A activities. In. er. io. the period of high market uncertainty measured by VIX, firms are less likely to undertake. al. M&As for the interim risk of completing a deal would increase sharply, which makes the deal. n. v i n C hpropose that investment less profitable. Also, Bernanke (1983) projects with irreversibility engchi U have the value of waiting. As market uncertainty increases, it is more valuable for firms to. postpone their investments and wait until the uncertainty is resolved. While Bloom (2012) and Panousi (2012) provide evidence that uncertainty rise significantly during recessions, it is less desirable for firms to undertake M&As. Another determination of whether a firm decide to undertake M&A or not is the synergy that the deal would bring to the combined firm in the future. According to Lambrecht (2004), synergy comes from economic of scale created by the combined firm and is correlated to industry demand. It rises in economic booms and falls in economic downturns. Despite increase in uncertainty and decrease in synergies, however, overconfident CEOs may still undertake more M&As because they are biased by their cognitive. As mentioned in 7.

(14) Malmendier and Tate (2005), the cognitive bias of overconfident CEOs include the illusion of control, high degree of commitment to good outcome, and abstract reference point. All of them induce CEOs to believe he can control the outcome and underestimate the possibility of failure when it comes to picking up investment project. Moreover, Doukas and Petmezas (2007) and Malmendier and Tate (2008) mention that overconfident CEO believe that they have superior skills as well as underestimate the risk and overestimate the synergy gains from the bid when evaluating M&A opportunities. As a result, there would be more available M&As opportunities in overconfident CEOs’ cognitive than in non-overconfident CEOs’ during recessions. We predict that overconfident CEOs would undertake more M&As than non-overconfident CEOs during recessions. Hypothesis 1.a. Overconfident CEOs are more likely to undertake M&As than non-. 政治大. overconfident CEOs during or after recessions due to their underestimation of uncertainty. 立. and overestimation of synergies.. ‧ 國. 學. Although overestimation of synergies and underestimation of risk would stimulate overconfident CEOs to undertake more M&As than non-overconfident CEOs. However, the. ‧. level of internal resource can determine if overconfident CEO would overinvest or underinvest. According to Heaton (2002) and Malmendier and Tate (2005), overconfident CEOs with. Nat. sit. y. insufficient internal fund or are highly financial constrained would undertake much less M&As. er. io. than non-overconfident CEOs. Because overconfident CEOs overestimate the equity value of the firms, which they’re managing, they believe the capital market undervalue their stocks.. n. al. i n U. v. This would cause overconfident CEOs to be less willing to issue equity or risky debt than non-. Ch. engchi. overconfident CEOs. In cases when overconfident CEOs do not have sufficient internal fund to finance investment project that would create value for firms, they would rather pass the project than accessing external fund from the capital market, for they find it too costly finance externally. During recessions, the internal fund of firms would reduce significantly due to decrease in market demand (Braun and Larrain, 2005; Campello, Gramham, and Harvey, 2010). Thus, overconfident CEOs who originally have just sufficient internal fund to finance M&As would find it unable to do so. Hence, they are prone to undertake less M&As than nonoverconfident CEOs. Hypothesis 1.b. Overconfident CEOs would undertake less M&As than nonoverconfident CEOs during or after recession, for they tend to underinvest relative to nonoverconfident CEOs when they do not have enough internal funds. 8.

(15) 2.2.2 Announcement Effect and Long-term Performance Roll (1986) proposed that overconfident (“hubris” in his literature) CEOs would overpay on M&As, which result in value-decreasing consequences. Also, Hayward and Hambrick (1997) show that premiums paid by acquiring firms are highly correlated with the degree of CEOs’ hubris, and greater the hubris endowed with CEOs the higher the premiums the firm pay. Similarly, Billett and Qian (2008) provide evidence that overconfident CEOs, measured by their acquisitiveness, face negative announcement return when announcing high-order deals. Malmendier and Tate (2008) provide evidence that announcement effects of M&As undertaken by overconfident CEOs are lower than those undertaken by non-overconfident CEOs for they might buy targets which bring negative NPV.. 政治大 problem more severe. According 立 to Kahle and Stulz (2013), decrease in demand during On the other hand, the reduced investment opportunities during recession make the. ‧ 國. 學. financial crisis would leave many investment opportunities no longer as valuable. Maksimovic. (2013) and Harford (2005) show that merger waves are accompanied by abundant investment opportunities and end with recessions when there are few investment opportunities. Thus,. ‧. overconfident CEOs have higher probability of purchasing targets which would bring value. sit. y. Nat. destruction to the firm during recessions.. al. er. io. Hypothesis 2. The announcement effect and long-term performance of M&A undertaken by. n. overconfident CEOs are lower than those undertaken by non-overconfident CEOs during recessions.. Ch. engchi. 9. i n U. v.

(16) 3. Empirical Analysis 3.1 Data We construct our dataset using data from Compustat database for firms’ accounting data, ExecuComp database for managers’ compensation data, CRSP database for stock price and return data, and SDC Merger and Acquisition database for M&A data. First, following Harford (2014), we include all the S&P 1500 firms but financial firms (4-digits SIC 6000-6999) and regulated utilities (4-digits SIC 4900-4999) in Compustat ranging from 1990 to 2016. Second we merge the Compustat data with ExecuComp to obtain CEO compensation data. After merging with Execucomp, our data range shorten from 1993 to 2016 for ExecuComp only has data available after 1992 and we lag most of our independent variable by 1 year. Third, we. 政治大 Finally, we merge with SDC for 立M&A data. Here include all U.S. domestic completed merger,. merge the data with CRSP with same range to compute one of our control variable, Stock return.. ‧ 國. 學. acquisition of majority interest, and asset acquisition undertaken by S&P 1500 firms ranging from 1993 to 2016. After deleting all the missing observations, we have 22800 firm years and. 4248 M&A deals from 1993 to 2016. The mean of overconfident CEOs in our sample is 0.3767.. ‧. We show our summary statistics in Table 2.. y. Nat. sit. Table 3 shows the statistics of overconfident CEOs. First, Panel A exhibits the distribution. er. io. of overconfident CEOs in each year. It is noticeable that the percentage of overconfident CEOs. al. decline in 2001 and 2008-2008 periods, which induce that recessions might make. n. v i n overconfident CEOs be less overconfident. We further examine if the percentage of Ch U i e h n c g overconfident CEOs is lower during recessions than during non-recessions. The statistics are. shown in Panel B. In line with our expectations, the difference in the percentage of overconfident CEO is lower during recessions than non-recession periods no matter what measurement of recession years we adapt. Panel C exhibit the difference in mean of overconfident CEOs before and after the 2001 Recession. From the statistics, we can’t tell that if the mean of overconfident CEOs differ before and after 2001. However, Panel D reports that the means of overconfident CEOs is lower after the 2008 Recession 3.2 CEO Overconfidence In this paper, we follow the logic of Malmendier and Tate (2008) and use the method of Campbell, Gallmeyer, Johnson, Rutherford, and Stanley (2011) respectively to construct 10.

(17) managerial overconfidence measurement. Unlike outside investors who can diversify their portfolio easily, CEOs have a large portion of their asset and human capital invested in firm which leave them unable to diversify the idiosyncratic risk they face. Under this scenario, risk-averse CEOs should exercise their options as soon as possible when the moneyness of the option is high enough in order to avoid the under-diversification problem (Hall and Murphy, 2002). If a CEO do not act in this way, which is postponing their option exercise when they are eligible to exercise and the stock price is sufficiently high, we can infer him as overconfident for he overestimates his ability to push the stock price higher in the future to capture more benefit. Following this logic, we can identify overconfident CEOs by their option holding/exercising behavior.. 治政大exercise price to calculate the his postpone of option-exercising. Instead of using actual 立 moneyness of the options a CEO holds or exercises, we derive the moneyness using estimated. Following Campbell et al. (2011), we define a CEO as High-optimism (overconfident) by. ‧ 國. 學. average exercise price. To estimate average exercise price, we first compute the realizable value per option by dividing total realizable option value of exercisable options (ExecuComp variable. ‧. OPT_UNEX_EXER_EST_VAL) by number of exercisable options (OPT_UNEX_EXER _NUM). Then we subtract realizable value per option from stock price at the fiscal year end. y. Nat. sit. (Compustat variable PRCC_F) to obtain average exercise price. Finally, the moneyness of an. er. io. option is calculated by dividing the per-option realizable value by estimated average exercise. al. price. By Campbell et al. (2011)’s definition, a High-optimism CEO would hold exercisable. n. v i n option which is over 100% in the money C hat least twice in hisUtenure. On the other hand, we also i normal degree of confidence to e n g corhhaving need to define CEOs who are underconfidence. complement the overconfidence measure. Similar to High-optimism CEO, we classify a CEO as Low-optimism (underconfidence) when he at least twice in his tenure exercise options that is under 30% in the money and do not hold any option which is over 30% in the money. There’s a little difference when we compute the moneyness of exercised options. We first compute average exercise price for the exercised option as follow: PRCC_F-OPT_EXER_VAL/ OPT_EXER_NUM. Then we divide per-option realized value by average exercise price to derive moneyness of exercised options. Finally, we define a CEO who is either classified as High-optimism or Low-optimism as Moderate-optimism (CEO having normal degree of confidence). They hold or/and exercise options which are between 30% and 100% in the money. In our paper, we define High-optimism CEO as overconfident CEO and both Low-optimism 11.

(18) CEO and Moderate-Optimism CEO as non-overconfident CEOs. Before any classification of high-optimism or low-optimism, we assume all the CEO are moderate-optimism. In addition, as we mentioned that a CEO is classified as high-optimism or low-optimism only if he shows the corresponding behavior at least twice during his tenure, however, his classification starts from the first time he shows the corresponding behavior. Moreover, if a CEO shows opposite behavior twice after his classification of high-optimism or low-optimism, we would change his classification to the opposite from the first time he show the opposite behavior. For example, if a CEO was first classified as high-optimism, he would be classified as low-optimism if he show the opposite behavior twice after his previous classification. Finally, we can’t classify CEO who don’t have option at all or have all their. 政治大. options out of money, so we exclude those CEOs from our sample.. 立. 3.3 Recession Years. ‧ 國. 學. In this paper, we use National Bureau of Economic Research (NBER)’s definition as our main measurement of recession years. Because the recession definition from NBER is a widely. ‧. used measurement in past academic literatures (Burns and Mitchell, 1946; Harford, 1999; Halling, Yu, and Zechner, 2016) and it only capture recessions with sufficient depth and. y. Nat. sit. influence, we adapt it as our main measurement. The recession described in NBER is the period. er. io. when macroeconomic activity goes form peak to trough and expansion is the period when. al. macroeconomic activity goes from trough to peak. Using, NBER’s data, we define 2001, 2008,. n. v i n and 2009 as recession years and denote variable as 1 in these year. C hthe recession dummy engchi U. In addition, we have two alternative measurements of recession years as complement, which are definition from The Organization for Economic Cooperation and Development (OECD) and Chicago Fed National Activity Index (CFNAI) respectively. First, OECD United States business cycle are defined by the movement of their Composite Leading Indicators. There are turning points of this indicators when indicators deviate from trend series. Recessions and expansions are defined as periods between turning points. Second, the definitions of recessions and expansions from CFNAI are periods when the 3-month moving average of index goes below-0.7 and periods when the 3-month moving average goes beyond +0.2 respectively. We denote the recession dummy variable as 1 in the recession years defined by the forementioned measurement. The recession years defined by the fore-mentioned institutions are shown in Table 1. 12.

(19) 3.4 Probability of Bidding To examine if overconfident CEOs are more likely than non-overconfident CEOs to undertake M&As during recessions or after recessions, we adapt Harford and Uysal (2014)’s probit model. The model is used to examine the likelihood of a firm to undertake M&A deals and is described in Equation (1) as follows: 𝑃𝑟𝑜𝑏(𝐵𝑖𝑑|𝑋𝑖.𝑡 ) = 𝛽0 + 𝛽1 𝑂𝑣𝑒𝑟𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒𝑖,𝑡-1 + 𝛽2 𝑅𝑒𝑐𝑒𝑠𝑠𝑖𝑜𝑛𝑖,𝑡 +𝛽3 𝑂𝑣𝑒𝑟𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒𝑖,𝑡-1 × 𝑅𝑒𝑐𝑒𝑠𝑠𝑖𝑜𝑛𝑖,𝑡 + 𝛽4 𝑆𝑎𝑙𝑒𝑠𝑖,𝑡-1 +𝛽5 𝐶𝑎𝑠ℎ ℎ𝑜𝑙𝑑𝑖𝑛𝑔𝑠/𝑇𝐴𝑖,𝑡-1 + 𝛽6 𝑀𝑎𝑟𝑘𝑒𝑡-𝑡𝑜-𝑏𝑜𝑜𝑘𝑖,𝑡-1 +𝛽7 𝑀𝑎𝑟𝑘𝑒𝑡 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖.𝑡-1 + 𝛽8 𝐸𝐵𝐼𝑇𝐷𝐴/𝑇𝐴𝑖.𝑡-1. 治政 +𝛽 𝑆𝑡𝑜𝑐𝑘 𝑟𝑒𝑡𝑢𝑟𝑛 + 𝛽 𝑀𝐴 大 𝑙𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦 立 9. 𝑖,𝑡-1. 10. 𝑖.𝑡-1. (1). ‧ 國. 學. +𝛽11 𝐻𝐻𝐼𝑖,𝑡-1 + 𝛽12 𝑅𝑎𝑡𝑒𝑑𝑡-1 + 𝛽13 𝐴𝑔𝑒𝑡 + 𝛽14 𝑀𝑎𝑙𝑒𝑡 + 𝜖𝑖,𝑡. The dependent variable “Bid” denotes 1 if a firm makes a bid in a firm year or 0 if not.. ‧. The control variables of the model includes natural logarithm of sales for Almazan, De Motta, Titman, and Uysal (2010) evidence that larger firms have higher probability of conducting. y. Nat. sit. M&As. Besides, we include EBITDA/TA for Roll (1986) and Harford (1999) show that firms. er. io. with better operating performance are more likely to undertake M&As. Also, we include. al. market-to-book ratio and stock return to control the higher likelihood to make a bid among. n. v i n firms with more investment opportunities. market leverage is included in the C h At the same time, U i e h n g chaving a rating. Moreover, we include cash regressions to separate the effects of leverage and holding for Harford (1999) evidences that firms with larger cash holdings are more acquisitive. Since Schlingemann, Stulz, and Walkling. (2002) propose that higher liquidity of the market for corporate assets make it more easier for firms to make M&A deals, we include the variable MA Liquidity. Industry concentration can also influence the probability of bidding for there are fewer targets within industry which is more concentrated. We use Herfindahl Index to proxy for industry concentration. As Harford and Uysal (2014) evidence that firms with bond-rating are more likely to undertake M&As, we add the rating dummy, Rated, to control that effect. In addition to Harford and Uysal (2014)’s control variables, we also add Age for Yim (2013) shows that young CEOs are more likely to undertake M&As than older CEOs. We also add the variable, Male, which denotes 1 if the CEO is male for Huang and Kisgen (2013) evidence that 13.

(20) male CEOs are more acquisitive than female CEOs. Finally, the construction of overconfidence dummy and recession dummy are described in Section 3.1.1 and 3.1.2. All the control variable are lagged by 1 year to examine the causality except for Recession, Age, and Male. The details of all the variables are shown in Appendix. To test the effect of the 2001 Recession and the 2008 Recession separately, we divide our sample into 6 subsamples, which cover 3 and 5 years before and after 2001/2008, 1993 to 2007, and 2002 to 2016. 3.5 Announcement Effect To investigate the market reaction to the M&A deals announced by overconfident CEOs. 治政大predicted return is derived from of cumulative abnormal return (CAR) of the acquirers. The 立 market model. We use the firm’s return and benchmark return from 205 days before event date during or after recessions, we follow Harford and Uysal (2014)’s model to run the regression. ‧ 國. 學. to 6 days before event date to compute the beta for each firm for each time. The benchmark return is the value-weighted market return including dividend in CRSP database. The length of date. The model is described in Equation (2) as follows:. Nat. sit. y. ‧. our CAR window is 5 days, ranging from 2 days before the event date to 2 days after the event. io. er. 𝐶𝐴𝑅𝑖,𝑡 = 𝛽0 + 𝛽1 𝑂𝑣𝑒𝑟𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒𝑖,𝑡-1 + 𝛽2 𝑅𝑒𝑐𝑒𝑠𝑠𝑖𝑜𝑛𝑖,𝑡. al. +𝛽3 𝑂𝑣𝑒𝑟𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒𝑖,𝑡-1 × 𝑅𝑒𝑐𝑒𝑠𝑠𝑖𝑜𝑛𝑖,𝑡 + 𝛽4 𝑆𝑎𝑙𝑒𝑠𝑖,𝑡-1. n. v i n C h 𝑖,𝑡-1 + 𝛽6𝑀𝑎𝑟𝑘𝑒𝑡-𝑡𝑜-𝑏𝑜𝑜𝑘 +𝛽5 𝐶𝑎𝑠ℎ ℎ𝑜𝑙𝑑𝑖𝑛𝑔𝑠/𝑇𝐴 𝑖,𝑡-1 engchi U. +𝛽7 𝑀𝑎𝑟𝑘𝑒𝑡 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖.𝑡-1 + 𝛽8 𝐸𝐵𝐼𝑇𝐷𝐴/𝑇𝐴𝑖.𝑡-1. +𝛽9 𝑆𝑡𝑜𝑐𝑘 𝑟𝑒𝑡𝑢𝑟𝑛𝑖,𝑡-1 + 𝛽10 𝑀𝐴 𝑙𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦𝑖.𝑡-1 + 𝛽11 𝐻𝐻𝐼𝑖,𝑡-1 +𝛽12 𝑅𝑎𝑡𝑒𝑑𝑡-1 + 𝛽13 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑠𝑖𝑧𝑒𝑖,𝑡 + 𝛽14 𝑃𝑢𝑏𝑙𝑖𝑐 𝑡𝑎𝑟𝑔𝑒𝑡𝑖,𝑡 +𝛽15 𝑃𝑟𝑖𝑣𝑎𝑡𝑒 𝑡𝑎𝑟𝑔𝑒𝑡𝑖.𝑡 + 𝛽16 𝑊𝑖𝑡ℎ𝑖𝑛-𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦-𝑎𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛𝑖.𝑡 +𝛽17 𝐴𝑙𝑙 𝐶𝑎𝑠ℎ𝑖.𝑡 + 𝛽18𝐻𝑜𝑠𝑡𝑖𝑙𝑒𝑖.𝑡 + 𝛽19 𝐶𝑜𝑚𝑝𝑒𝑡𝑒𝑑𝑖,𝑡 +𝛽20 𝐴𝑔𝑒𝑡 + 𝛽21 𝑀𝑎𝑙𝑒𝑡 + 𝜖𝑖,𝑡. (2). There are several factors evidenced by previous literatures that would affect M&As announcement effect. Those factors include acquirer’s size, profitability, market-to-book ratio, 14.

(21) and stock return. Besides, M&A deal’s characteristics such as method of payment, the target is private or public, if there are multiple bidder, if the deal made by acquirer is hostile or friendly, and deal size relative to acquirer would also affect the market reaction to the announcement of the deal. Furthermore, industry characteristics such as M&A liquidity and concentration of the market play an important role in determining the announcement effect. Besides the original control variable in Harford and Uysal (2014)’s model, we add Age for Yim (2013) shows that M&As undertaken by young CEOs are more value-decreasing than those undertaken by older CEOs. Moreover, we add the variable, Male, which denotes 1 if the CEO is male. Because Huang and Kisgen (2013) evidence that the announcement effect of M&As undertaken by male CEOs are lower than M&As undertaken by female CEOs. Finally,. 治政 Section 3.1.1 and 3.1.2. All the control variable are lagged大 by 1 year to examine the causality 立 except for Recession, Age, and Male. The details of all the variables are shown in Appendix. we add our overconfidence dummy and recession dummy to the model, which are described in. ‧ 國. 學. To test the effect of the 2001 Recession and the 2008 Recession separately, we divide our and 2002 to 2016.. ‧. sample into 6 subsamples, which cover 3 and 5 years before and after 2001/2008, 1993 to 2007,. y. Nat. io. sit. 3.6 Long-term Performance. n. al. er. We follow Duchin and Schmidt (2013)’s model to investigate if the long-run performance. i n U. v. following M&A undertaking by overconfident CEOs during recessions are worse. The. Ch. engchi. measurement for long-run performance is the 24 month buy-and-hold abnormal return (BHAR) after the announcement of the deal. The benchmark portfolios follow Lyon et al. (1999)’s method, which use all NYSE/AMEX/Nasdaq’s firms to construct 70 portfolios based on 14 size and 5 book-to-market ratio. The model is described in Equation (3) as follows:. 15.

(22) 𝐵𝐻𝐴𝑅𝑖,𝑡 = 𝛽0 + 𝛽1 𝑂𝑣𝑒𝑟𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒𝑖,𝑡-1 + 𝛽2 𝑅𝑒𝑐𝑒𝑠𝑠𝑖𝑜𝑛𝑖,𝑡 +𝛽3 𝑂𝑣𝑒𝑟𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒𝑖,𝑡-1 × 𝑅𝑒𝑐𝑒𝑠𝑠𝑖𝑜𝑛𝑖,𝑡 + 𝛽4 𝑆𝑖𝑧𝑒𝑖,𝑡-1 +𝛽5 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑑𝑒𝑎𝑙 𝑠𝑖𝑧𝑒𝑖,𝑡-1 + 𝛽6 𝑃𝑟𝑖𝑐𝑒 𝑟𝑢𝑛-𝑢𝑝𝑖,𝑡-1 +𝛽7 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑇𝑜𝑏𝑖𝑛′ 𝑠 𝑄𝑖.𝑡-1 + 𝛽8 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖.𝑡-1 +𝛽9 𝐹𝑟𝑒𝑒 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠𝑖,𝑡-1 + 𝛽10 %𝑑𝑒𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝑖.𝑡 +𝛽11 %𝑁𝑖,𝑡 + 𝛽12 𝐷𝑖𝑣𝑒𝑟𝑠𝑖𝑓𝑦𝑖𝑛𝑔𝑖,𝑡 + 𝛽13 𝑃𝑢𝑏𝑙𝑖𝑐 𝑡𝑎𝑟𝑔𝑒𝑡𝑖,𝑡 +𝛽14 𝐴𝑙𝑙 𝑐𝑎𝑠ℎ𝑖,𝑡 + 𝛽15 𝑃𝑢𝑏𝑖𝑐 𝑡𝑎𝑟𝑔𝑒𝑡 × 𝐴𝑙𝑙 𝑐𝑎𝑠ℎ𝑖.𝑡 (3). +𝛽16 𝐻𝑖𝑔ℎ 𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛𝑖.𝑡 + 𝛽17 𝐴𝑔𝑒𝑖.𝑡 + 𝜖𝑖,𝑡. There are some factors, which would affect firm’s long-run performance after the announcement of M&A. First, we control acquirer’s size in firm level as well as their Tobin’s. 治政大 during periods of high market who show the lower long-term performance follows acquisition 立 valuation, we add the valuation-related variables, High-valuation and Price run-up,. Q and leverage in industry level. Second, as evidenced by Bouwman, Fuller, and Nain (2009),. ‧ 國. 學. respectively. Also, we control the effect of excess cash flow on long-term stock performance after M&As by deriving excess cash flow from Dittmar and Mahrt-Smith (2007)’s model In. ‧. addition, we control several deal characteristics which would affect M&As’ long-run performance including relative deal size, private/public target, all-cash financing, and. y. Nat. sit. diversifying deal. Moreover, we include CEO’s age for Yim (2010) find that M&As undertaken. er. io. by young CEOs worth less. As Duchin and Schmidt (2013) show that M&As long-term. al. performance following M&As undertaken during merger waves is lower. We then add number. n. v i n and value of M&A deals of an industry before the announcement of the deal C hin prior 12 month U i e h n c in the sample periods to control the effect relative to the total number and value of M&A g deals. of merger wave. Finally, we add our overconfidence and recession dummies. All the control variable are lagged by 1 year to examine the causality except for Recession, Age, and Male. The details of all the variables are shown in Appendix. To test the effect of the 2001 Recession and the 2008 Recession separately, we divide our sample into 6 subsamples, which cover 3 and 5 years before and after 2001/2008, 1993 to 2007, and 2002 to 2016.. 16.

(23) 4. Empirical Results 4.1 Probability of Bidding Table 4 exhibits the results of probit analysis, where the dependent variable, Bid, denotes 1 if a firm announce an M&A deal in a firm year and 0, otherwise. We adapt the model of Harford and Uysal (2014), which is described in Section 3.1.3 as well as add our overconfident variable and recession variable to the regression. All the standard error of control variables are clustered by firm. We also run regression with year fixed and industry fixed effect. First, we examine the effect of CEO overconfidence on acquisitiveness for the full sample. As shown in columns (1) and (2) of Panel A, the coefficient of overconfidence is positive and. 治政大 2007; Billett and Qian, 2008; consistent with previous literatures (Doukas and Petmezas, Malmendier and Tate, 2008), 立 which evidence that overconfident CEOs are more likely to. the effect is strongly significant no matter we control the fixed year effect or not. This result is. ‧ 國. 學. conduct M&As than non-overconfident CEOs. Second, we examine the effect of recessions on the probability of bidding. Here, we adapt NBER’s definition as our recession measurement.. ‧. Columns (2) and (5) in Panel A shows that recessions have significantly negative effect on the probability of bidding, which means that firms undertake less M&As during recessions. This. Nat. sit. y. result is aligned with the Figure 1, which shows that the number and value of M&A deals. er. io. decline significantly during recessions. Third, we test if overconfident CEOs would undertake more M&As than non-overconfident CEOs during recessions. The results are shown in. n. al. Ch. i n U. v. columns (3) and (6) in Panel A with the interaction of Overconfidence and Recession. However,. engchi. both coefficients are not significantly different rim zero. This may due to difference in magnitude of recessions. Hence, we examine the effect of the 2001 Recession and the 2008 Recession respectively. To examine the effects of the 2001 Recession and the 2008 Recession respectively, we divide the sample into 2 subsamples, which cover data from 1993 to 2007 and 2002 to 2016. Also, we replace the variable Recession with Post01 or Post08, which denotes 1 if the firm year is 2001/2008 or later. Panel B exhibits the results of our first subsample, which includes data from 1993 to 2007 to study the effect of the 2001 Recession. As shown in columns (1), (4), and (7), coefficients of Overconfidence are all positively significant. These are consistent with the results if we run the regression using full sample, which show that overconfident CEOs undertake more M&As than non-overconfident CEOs overall. Then, we test if there’s 17.

(24) systematic difference in firms’ M&A behavior after 2001. As shown in columns (2), (5), and (8), the coefficients of Post01 is positive. This shows that firms launch more M&As after 2001. Finally, as we can see in column (3), (6), and (9), the interaction of Overconfidence and Post01 is insignificant, which evidence that the acquisitiveness of overconfident CEOs do not change after the 2001 Recession. The insignificance may due to the smaller magnitude of the 2001 Recession, which is not sufficient to influence overconfident CEOs’ behavior. Panel C exhibits the results of our second subsample, which includes data from 2002 to 2016 to study the effect of the 2008 Recession. Here, we find a different story from our first subsample. First, as shown in columns (1), (4), and (7), the coefficients of Overconfidence reduce or even lose their significance. This implies that overconfident CEOs merely undertake. 政治大 overall. Second, column (2) reports that the amounts of M&A deals decrease significantly three 立 years after the eruption of the 2008 Financial Crisis. Finally, as shown in columns (3), (6), and little or no more M&As than non-overconfident CEOs during the period from 2002 to 2016. ‧ 國. 學. (9), the coefficients of interaction of Overconfidence and Post08 are significantly negative. The results evidence that the acquisitiveness of overconfident CEOs decrease sharply after the 2008. ‧. Recession. We propose that the results can support our hypothesis 1.b. that overconfident CEOs undertake less M&As relative to non-overconfident CEOs after recessions, for they tend to cut. y. Nat. sit. off investment rather than access fund from capital market if they do not have sufficient internal. n. al. er. io. resources to finance investment projects.. i n U. v. We test if our proposition is true by running the regression in subsamples divided by their. Ch. engchi. level of financial constraint and cash holdings. We adapt WW Index constructed by Whited and Wu (2006) to measure financial constraints. The index in constructed as follow: -0.091CF0.062DIVPOS+0.021TLTD-0.044LNTA+0.102ISG-0.035SG, where CF is the ratio of cash flow to total assets; DIVPOS is an indicator that takes the value of one if the firm pays cash dividends; TLTD is the ratio of the long-term debt to total assets; LNTA is the natural log of total assets, ISG is the firm’s 3-digit industry sales growth; SG is firm sales growth. The value of index increase with the degree of the financial constraint a firm faces. Then we rank the observations by their level of financial constraint each year and classify the 30% highest financial constrained observations into high financial constraint subsample and the 30% lowest financial constrained observations into low financial constraint subsample. We also classify observations whose level of financial constraint lie between 30%-70% in our sample as medium financial constraint subsamples. We present the results in Panel D. 18.

(25) As shown in Panel D, first, the coefficients of Overconfidence are significantly positive for the lowest constrained group but insignificant for groups with medium and high level of financial constraint. The results are consistent with Malmendier and Tate (2005, 2008), who show that overconfident CEOs undertake more M&As than non-overconfident CEOs only when they have enough financial resources. Also, the coefficients of interaction between Overconfidence and Post08 within highly financially constrained groups are insignificant while significantly negative within firms which are low financially constrained. This evidences that overconfident CEOs who have abundant financial resources before the 2008 Recession would reduce significantly more in undertaking M&As after recessions. Braun and Larrain (2005) and Campello, Gramham, and Harvey (2010) show that firms would face significant decrease in financial resources during recessions. On the other hand, Malmendier and Tate (2005, 2008). 政治大 bypass investment project than 立financing it externally when they have limited internal evidence that overconfident CEOs view external finance too costly and they would rather. ‧ 國. 學. resources. Combining the theories we mention above, we propose that overconfident CEOs react more to the reduction in financial resource and reduce more in undertaking M&As than non-overconfident CEOs after recessions. These results show that the effect of reduction in. ‧. financial resources outweigh the effect of underestimating risk or overestimating synergies by. io. er. than non-overconfident CEOs after the 2008 Recession.. sit. y. Nat. overconfident CEOs, which makes overconfident CEOs to reduce more in undertaking M&As. al. Next, we examine if different levels of excess cash holdings would cause overconfident. n. v i n CEOs to behave differently after theC 2008 Recession and beUthe channel to explain the reduction hengchi. in undertaking M&As by overconfident CEOs. Malmendier and Tate (2005, 2008) show that overconfidence CEOs with abundant internal resources would undertake more M&As than non-overconfident CEOs and underinvest relative to non-overconfident CEOs when they have few internal resources. To test this hypothesis, first, we rank our observations by their level of excess cash holdings each year. We adapt Bates (2009)’s method to construct our measurement of excess cash holding. The details of excess cash holding constructions are described in Bates (2009)’s paper. Then we divide sample into 3 different groups, which are the 30% highest excess cash holding firms, the 30 % lowest excess cash holdings firms, and firms with excess cash holdings level lying between 30%-70% among the sample. Panel E exhibits the results of regression of different levels of excess cash holdings. First, the coefficients of Overconfidence are only significant in group with medium level of excess cash. This is slightly difference from 19.

(26) Malmendier and Tate (2005, 2008)’s proposition that overconfident CEOs only with high level of internal financial resources would undertake more M&As than non-overconfident CEOs. Second, coefficients of Overconfident and Post08 are significantly negative within group with medium level of excess cash. This may imply that overconfident CEOs who have enough excess cash to overinvest in M&As before the 2008 Recession find it unable to finance M&A deals after the recession due to decrease in internal resources caused by recession (Braun and Larrain, 2005). Viewing external finance too costly, they are unwilling access funds from capital market even if the M&A deal would bring positive NPV to the firm. Thus, they reduce more in undertaking M&As than non-overconfident CEOs after the 2008 Recession. We also test if overconfident CEOs with different levels of investment opportunities. 政治大 opportunities by Tobin’s Q, which is the sum of the market value of book assets (AT) and the 立 market value of common equity (CSHO×PRCC), minus the sum of common equity (CEQ) and. would behave differently after the 2008 Recession. We measure the level of investment. ‧ 國. 學. deferred taxes (TXDB), all over book value of assets (AT). The results are shown in Panel F. First, the coefficients of Overconfidence are only significant in group of low Tobin’s Q. This. ‧. may results from the fact that overconfident CEOs overestimate the low investment opportunities which are not captured by non-overconfident CEOs. As a results, overconfident. y. Nat. sit. CEOs are more acquisitive relative to non-overconfident CEOs within firms with low. er. io. investment opportunities. However, the coefficients of interaction between Overconfidence and. al. Post08 are all insignificant. This show that level of investment opportunities is not the channel. n. v i n C hCEOs’ investmentUdecision. for recession to influence overconfident engchi. In summary, our empirical results are consistent with Malmendier and Tate (2005, 2008), who show that overconfident CEOs undertake more M&As than non-overconfident CEOs overall due to overestimation of return and underestimation of risk and the phenomenon is significant within firms within low level of financial constraints. However, overconfident CEOs reduce significantly more in undertaking M&As after the 2008 Recession, especially for firms with low level of financial constraint, which overinvest before the recession. We show that the effect of reduction in financial resources available outweighs the effect of underestimation of risk and overestimation of synergies by overconfident CEOs and cause them to reduce more in undertaking M&As.. 20.

(27) 4.2 Announcement Effect Table 5 exhibits the summary statistics of the cumulative abnormal return (CAR) and Table 6 exhibits the OLS regression of CAR. The construction of CAR is described in Section3.1.4. As shown Panel A, the average CAR for the full sample is significantly positive, which is consistent with Harford and Uysal (2014) and Masulis, Wang, and Xie (2007), who also find positive average CAR in their whole samples. Next, we check difference in average CAR between deals made during recessions and non-recessions. The second column in Panel A exhibits that average CAR of M&As undertaken during recessions is significantly negative while the average CAR of M&As undertaken during nonrecessions periods is significantly positive. This result evidences that firms are more likely to. 政治大. undertake value-decreasing M&As during recessions than during non-recession periods.. 立. Then we examine the difference in CAR of M&As undertaken by overconfident and non-. ‧ 國. 學. overconfident CEOs. As shown in the third column, average CAR for overconfident and nonoverconfident CEOs are both positive and significant. However, average CAR for. ‧. overconfident CEOs is significantly higher than non-overconfident CEOs’. This result. y. Nat. contradicts to Malmendier and Tate (2008) and Billet and Qian (2008)’s findings, which show. sit. that overconfident CEOs have negative impact on the announcement effect measured by CAR.. er. io. We believe that this inconsistence may result from different in sample periods between our. al. v i n range only from 1980 to 1994, andC thehaverage CAR for U e n g c h i their sample is slightly significantly n. study and previous literatures. For example, the data covered by Malmendier and Tate (2008). negative. While the average CAR of our study is significantly positive. Furthermore, recent literatures shows that overconfident CEOs do not always destroy firm value but create value. Next, we present the difference in average CAR before 2001/2008 and after 2001/2008 in Panel B and Panel C respectively to check if there’s systematic difference after the recession. The third column in Panel B, which include data ranging from 1993 to 2007 shows that M&As undertaken after 2001 have significantly higher average CAR than M&As undertaken before 2001. The results can somewhat explain why our average CAR for the whole sample is positive and is contrary to older literatures (e.g. Andrade et al. (2001) and Moeller et el. (2004)), which show that acquirers do not gain from the deals. There might be systematic difference in announcement effect of M&As between difference periods. Panel C exhibits that average CAR 21.

(28) for M&As undertaken after 2008 is lower than those undertaken before 2008 but the difference is insignificant. The result show that the reaction of investors to the announcement of M&A does not change after the 2008 Recession. This means that M&As undertaken after 2008 do not create less value than those undertaken before 2008. Table 6 shows the regression results of CAR. Panel A exhibits the results when we examine the difference in CAR between recession and non-recession periods. First, as shown in column (1) and (4), the coefficients of overconfidence are significantly positive. This result is consistent with the statistics we present in Table 5, which shows that M&As undertaken by overconfident CEOs have higher announcement effect. Columns (2) reports that recessions have negative impact on the announcement effect. This implies that M&As undertaken during. 治政大 Next, we examine if the that synergy created by M&As would reduce during recessions. 立 announcement effect of M&As undertaken by overconfident CEOs would change during recessions create less value for acquirers and is consistent with Lambrecht (2004), who show. ‧ 國. 學. recessions. As shown in column (3) and column (6), the coefficients of overconfidence and recessions are positive but insignificant, which do not support our hypothesis that. ‧. overconfident CEOs are more likely to undertake value-decreasing M&As during recessions. This may imply that overconfident CEOs become more cautious when undertaking M&As. io. sit. y. Nat. during recessions.. n. al. er. We further test if the the 2001 and 2008 Recession have different impact on overconfident. i n U. v. CEOs and the CAR of M&As undertaken by them. The results are shown in Panel B and Panel. Ch. engchi. C with independent variables Post01 and Post08, which denote 1 after 2001/2008 and 0, otherwise. In Panel B, columns (1), (4), and (7) exhibit that positive effect of overconfidence on CAR weakens in periods before 2008. Also, we do not see significant difference in CAR after the 2001 Recession nor do the effect of overconfident on CAR change after the 2001 Recession, which is shown in columns (3), (6), and (9). In Panel C, the positive effect of overconfidence on M&As is still strongly significant, as shown in columns (1), (4), and (7). However, the coefficients of Overconfident×Post08 are insignificant, which do not provide evidence that the effect of overconfidence on announcement effect would change after recessions, either. To summarize, first, our results are more close to past literatures such as Goel and Thakor (2008), Gervais, Heaton, and Odean (2011), who posit that overconfident CEOs would take the 22.

(29) necessary risk that rational CEOs don’t want to take. Thus, overconfidence can help CEO make first-best investment decisions. However, investors’ better reaction toward M&As undertaking by overconfident CEOs do not change during and after recessions. This indicates that the overestimation of synergies or underestimation of uncertainty do not lead overconfident CEOs to undertake value decreasing M&As during or after recessions.. 4.3 Long-term Performance Table 7 shows the summary statistics of 24-month buy-and-hold abnormal return (BHAR) after the M&A announcement date and Table8 presents the regression results for BHAR. We adapt Duchin and Schmidt (2013)’s model to run the regression with adjustment in the benchmark portfolio. The details of model are shown in Section 3.1.5.. 政治大 Panel A in Table 7 reports that the average BHAR for our full sample is 0.0283 and is 立 significantly positive. This result implies that M&As undertaken during our sample period can. ‧ 國. 學. create value for firms overall. We then check the difference in BHAR between M&As undertaken during recessions and non-recessions periods. As shown in the second column,. ‧. M&As undertaken during non-recession periods have higher BHAR. This result is also consistent with Lambrecht (2004), who shows that M&As undertaken during expansions can. y. Nat. sit. capture higher synergies than those undertaken during recessions. Next we divide the sample. er. io. into M&As undertaken by overconfident CEOs and non-overconfident CEOs. As shown in the. al. third column, average BHAR for overconfident CEOs is 0.0909 and significant difference from. n. v i n zero while the average BHAR for C non-overconfident CEOs h e n g c h i U is -0.241 but insignificant. The difference in average BHAR between overconfident and non-overconfident CEOs is aligned. with our CAR results, which show that overconfident CEOs have positive impact on the value of firm. Finally, Panel B and Panel C show that there’s no significant difference in BHAR before and after 2001/2008. We then examine the regression results of BHAR in Table 8. In Panel A, columns (1) and (4) exhibit that the coefficients of overconfidence positively significant. This again show that overconfident CEOs have positive impact on M&As, which is consistent with Goel and Thakor (2008) and Gervais et al. (2011), who propose that overconfident CEOs are more willing than non-overconfident CEOs to bear necessary risk to undertake investment which can create value for firms. Coefficients of Recession shown in columns (2) and (5) are both negative but insignificant. Hence, we could not find evidence that recessions have negative impact on M&A’s long-run performance. In columns (3) and (6), the 23.

(30) coefficients of interaction between Overconfidence and Recession are both insignificant. This shows that the long-term performance of overconfident CEOs in undertaking M&As do not worsen during recessions. This may imply that the overestimation of synergies and underestimation of risk do not lead them to undertake more value-decreasing M&As during recessions. In Panel B and Panel C, we present the regression results using independent variables Post08 and Post01. Columns (1), (4), and (7) in Panel B show that the coefficients of overconfidence are positively significant, which are consistent with the results if we run the regression in full data range. However, the interaction between Overconfidence and Recession are all negatively significant. This somewhat supports our hypothesis 2 that overconfident. 政治大 than non-recession periods, for there are less profitable M&A deals during recessions. On the 立 other hand, in Panel C, the coefficients of overconfidence become insignificant as shown in CEOs are more likely to undertake value-decreasing M&As during recession than recessions. ‧ 國. 學. columns (1), (4), and (7). This may result from the effect of the 2008 Recession that make it difficult for overconfident CEOs to create value for firms. Also, the effect of interaction. ‧. between Overconfidence and Post08 is insignificant, which means that long-term performance of overconfident CEOs in undertaking M&As does not deteriorate after the 2008 Recession.. y. Nat. sit. Combined with the results shown in Panel B, we infer that the failure experiences after the. al. er. io. 2001 Recession cause overconfident CEOs to be more cautious when encountering the shock. n. of the 2008 Recession. As a result, overconfident CEOs’ performance after 2008 is no. Ch. significantly poorer than performance before 2008.. engchi. i n U. v. In summary, overconfident CEOs do not undertake value-decreasing M&As during recessions in our full sample. Nevertheless, the positive effect of overconfidence on long-term performance decrease significantly after the 2001 Recession. This finding is consistent with our hypothesis that overconfident CEOs are more tend to undertake value-decreasing M&As during or after recessions.. 24.

(31) 5. Conclusion There are few M&A deals announced during recessions, however, we still witness some firms making big deals during M&As. This stimulate us to wonder about the determinant for firms to undertake M&As during recessions. We propose that it would be CEO overconfident that drive firms to undertake M&As during recessions, for overconfident CEOs would underestimate the increased uncertainty during recessions and overestimate the reduced synergies they can create in the future, which are not captured by non-overconfident CEOs (Malmendier and Tate, 2005, 2008; Doukas and Petmezas, 2007). On the other hand, however, overconfident CEOs might undertake less M&As than non-overconfident CEOs during recessions if they encounter decreased in possession of financial resources (Heaton, 2002; Malmendier and Tate, 2005, 2008). We examine which effect would dominant and influence. 政治大 opportunities during recessions立 than during non-recessions periods, overconfident CEOs are overconfident CEOs’ investment behavior. Moreover, due to less profitable investment. ‧ 國. recession periods.. 學. more likely to undertaking value-decreasing M&As during recessions than during non-. ‧. We find that overconfidence CEOs undertake more M&As than non-overconfident CEOs overall. However overconfident CEOs reduce more in undertaking M&As than non-. sit. y. Nat. overconfident CEOs after the 2008 Recession and the effect is significant. We further finds that overconfident CEOs with low level of financial constraint and medium level of excess cash. io. n. al. er. holding would cut back more in undertaking M&As after the 2008 Recession, which evidences. i n U. v. that reduction of financial resources by caused by recession lead overconfident CEOs to being. Ch. conservative when making M&A decisions.. engchi. On the other hand, we do not find significant difference in announcement effects of M&As undertaken by overconfident CEOs during recessions or after recessions. Nevertheless, the long-term performance of M&As undertaken by overconfident CEOs decrease after 2001 recessions. This result somewhat support our prediction that overconfident CEOs are more likely to undertaking value decreasing M&As during or after recessions. Our study contribute to the strand of literature such as Malmendier and Tate (2005, 2008) and Heaton (2002), who show that the investment behaviors of overconfident CEOs are highly influenced by the financial resources they control. We adapt recession as an external shock to show that overconfident CEOs reduce significantly more in undertaking M&As than nonoverconfident CEOs after the 2008 Recession due to the reduce of financial resources they control. 25.