Board Overconfidence in Mergers & Acquisitions: A Self-Attribution Bias

This study investigates whether overconfidence of board directors, gained via biased self-attribution in recent M&A deals, influences the quality of corporate acquisitions. We propose an experience-based measure of board overconfidence that complies with established theories in the fields of social psychology and group decision making and is related to the literature on CEO overconfidence and M&A transactions. The measure is found to correlate positively with optimistic insider trading of board directors before M&A deals and is thus a reliable proxy for board overconfidence. Based on a large set of public acquisitions carried out by large U.S. companies, we show that board overconfidence is negatively related to abnormal stock returns upon merger announcements and positively to the premiums paid in such transactions. The results are economically relevant and statistically robust and further suggest that the effect of board overconfidence is distinct from (and adds to) the documented influence of CEO overconfidence on the quality of corporate acquisitions.