EXPLAINING THE PREMIUMS PAID FOR LARGE ACQUISITIONS - EVIDENCE OF CEOHUBRIS

This study examines the role of a chief executive officer's hubris, or exaggerated self-confidence, in explaining the large size of some pre miums paid for acquisitions. In a sample of 106 large acquisitions, we found that four indicators of CEO hubris are highly associated with t he size of premiums paid: the acquiring company's recent performance, recent media praise for the CEO, a measure of the CEO's self-importanc e, and a composite factor of these three variables. The relationship b etween CEO hubris and premiums is further strengthened when board vigi lance is lacking -when the board has a high proportion of inside direc tors and when the CEO is also the board chair. On average, we found lo sses in acquiring firms' shareholder wealth following an acquisition, and the greater the CEO hubris and acquisition premiums, the greater t he shareholder losses. Thus, CEO hubris has substantial practical cons equences, in addition to having potentially great theoretical signific ance to observers of strategic behavior.