The paper "Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction" by Ulrike Malmendier and Geoffrey Tate explores the impact of overconfident CEOs on mergers and acquisitions (M&A) decisions. The authors argue that overconfident CEOs, who overestimate their ability to generate returns and perceive outside finance as overpriced, are more likely to undertake value-destroying mergers. They classify CEOs as overconfident based on their behavior in holding company stock options until expiration, which suggests persistent bullishness about the company's future prospects. Using a dataset of large US companies from 1980 to 1994, they find that overconfident CEOs are more acquisitive, particularly through diversifying deals, and that these effects are most pronounced in firms with abundant cash or untapped debt capacity. The market reacts more negatively to takeover bids by overconfident managers, as reflected in press coverage and stock price reactions. The study also examines alternative explanations for the observed behavior, such as inside information, but finds that overconfidence remains a significant driver of merger activity. The findings suggest that overconfidence challenges the effectiveness of stock and option grants as incentive mechanisms and highlights the importance of independent boards in mitigating such biases.The paper "Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction" by Ulrike Malmendier and Geoffrey Tate explores the impact of overconfident CEOs on mergers and acquisitions (M&A) decisions. The authors argue that overconfident CEOs, who overestimate their ability to generate returns and perceive outside finance as overpriced, are more likely to undertake value-destroying mergers. They classify CEOs as overconfident based on their behavior in holding company stock options until expiration, which suggests persistent bullishness about the company's future prospects. Using a dataset of large US companies from 1980 to 1994, they find that overconfident CEOs are more acquisitive, particularly through diversifying deals, and that these effects are most pronounced in firms with abundant cash or untapped debt capacity. The market reacts more negatively to takeover bids by overconfident managers, as reflected in press coverage and stock price reactions. The study also examines alternative explanations for the observed behavior, such as inside information, but finds that overconfidence remains a significant driver of merger activity. The findings suggest that overconfidence challenges the effectiveness of stock and option grants as incentive mechanisms and highlights the importance of independent boards in mitigating such biases.