Literature Review Women on boards and in TMTS and firm performance 89 Malmendier and Tate 2008 further find that the probability for conducting an acquisition is 65 percent higher for CEO s classified as overconfi dent confirming Roll s 1986 findings In case the merger is diversifying and does not require exter nal financing the effect is even stronger Interes tingly not only CEO overconfidence but also CEO dominance is important in explaining the decision to acquire another firm CEO dominance appears to be at least as significant as overconfidence Brown Sarma 2007 There are other drivers that further promote acqui sitiveness Harford 1999 reports that firms with abundant internal resources show a greater wil lingness to attempt acquisitions than other firms they are more inclined to make diversifying ac quisitions and their targets are rather unattractive to other potential bidders Harford 1999 finds abnormal declines in operating performance sub sequent to mergers in which a cash rich firm is involved Moreover there are strong incentives for mana gers to grow the firm beyond the optimal size By increasing resources and means under their con trol growth enhances managers power Jensen 1986 Following Baker et al 2004 I distinguish irrational managers behavior from moral hazard behavior Nonetheless both phenomena share common elements An alternative explanatory model to overconfidence for managerial striving for growth can be so called empire building from the field of moral hazard behavior The main common element is increased acquisitiveness at the expense of shareholders Activities are parti cularly intense in both cases if internal cash re serves are high7 The substantial difference is that empire builders act primarily to the personal benefit regarding power wealth and status which is likely to the detriment of shareholders whereas overconfident CEOs believe that they act in the in terest of shareholders Working in committees managers are even more prone to escalate their commitment to projects although outcomes have become uncertain She frin 2001 Behavioral obstacles external to the firm are psychologically induced errors of investors and analysts they also may behave irrationally and push managers for takeovers that promise to build earnings but destroy economic value She frin 2001 Investors and analysts may place con siderable pressure on managers 4 2 5 Potential effects on investment policy Heaton 2002 characterizes managers as optimi stic when they systematically overrate the proba bility of a positive performance of their firm while underrating the probability of negative firm per formance Heaton 2002 discusses managerial optimism in relation to free cash flow available to the firm and explains two offsetting biases First ly optimistic managers prefer internal financing They believe that capital markets undervalue their risky securities In case they depend on external financing optimistic managers may thus miss pro jects even with a positive net present value NPV Second they overvalue their own corporate pro jects as well as their own ability to manage the se projects Optimistic managers believe that the expected projects NPVs are higher than realistic assumptions predict them to be They are prone to invest in projects with a negative NPV Heaton 2002 Thus managerial optimism predicts biased cash flow estimates8 and also a pecking order ca pital structure decision Furthermore firms with overconfident Chief Fi nancial Officers CFOs use lower discount rates to value cash flows Ben David Graham Harvey 2007 They invest more and use more debt The 7 See also Malmendier and Tate 2005 and Jensen 1986 8 Statman and Tyejbee 1985 find that decision makers in firms who evaluate forecasts consider those to be optimistically biased and that they adjust the figures accordingly CEO optimism and overconfidence

Vorschau DIRK-Forschungsreihe Band 21 Workforce diversity and personal policies Seite 89
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