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Sitting on the Board or Sitting on the Throne? Evidence of Boards' Overconfidence from the Italian Market
Author(s) -
Fattobene Lucrezia,
Caiffa Marco
Publication year - 2016
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/ecno.12055
Subject(s) - overconfidence effect , proxy (statistics) , sitting , certainty , economics , empirical evidence , actuarial science , business , accounting , econometrics , psychology , demographic economics , social psychology , statistics , mathematics , medicine , philosophy , geometry , epistemology , pathology
Between things we know with certainty and things we do not know absolutely there is a continuum spectrum of things we know something about: but how much do we know? People think they know more than they actually do: this tendency is defined as overconfidence. We explore the phenomenon with respect to mergers and acquisitions (M&As) and we introduce a new proxy for overconfidence: interlocking directorship (ID). We review different factors at the origin of this decision making (DM) bias and we theoretically justify why directors may be affected by it. Using event‐study methodology, an empirical analysis is conducted on a multi‐sector sample of Italian listed companies, which includes 296 M&A deals realized over the period 2000–2013. We analyse the impact of these extraordinary operations using cumulative abnormal returns (CARs) adding in the model control variables and measures of overconfidence. Results show negative and statistically significant average CARs around the date of announcement of the operations, suggesting that M&As are value destructive in the short term, and sitting on more than one board even increases this result, corroborating the hypothesis of managerial overconfident evaluations.