Ulrike Malmendier and Geoffrey Tate analyze how CEO overconfidence influences merger activity and market reactions. They find that overconfident CEOs are more likely to make acquisitions, especially diversifying deals, and are more likely to conduct value-destroying mergers. These effects are strongest in firms with abundant cash or untapped debt capacity. The market reacts more negatively to takeover bids by overconfident managers. The authors use CEO stock option holdings as a measure of overconfidence, finding that CEOs who hold options until expiration are more acquisitive. They also use press coverage to measure overconfidence, finding that CEOs described as "confident" or "optimistic" are more likely to make acquisitions. The study shows that overconfident CEOs overestimate the value of mergers and underestimate the risks, leading to value-destroying deals. The market's negative reaction to these deals supports the overconfidence theory. The authors argue that overconfidence is an important determinant of merger activity and that overconfident CEOs are more likely to conduct mergers when they have internal financing options. The study provides empirical evidence that overconfidence influences merger decisions and market reactions.Ulrike Malmendier and Geoffrey Tate analyze how CEO overconfidence influences merger activity and market reactions. They find that overconfident CEOs are more likely to make acquisitions, especially diversifying deals, and are more likely to conduct value-destroying mergers. These effects are strongest in firms with abundant cash or untapped debt capacity. The market reacts more negatively to takeover bids by overconfident managers. The authors use CEO stock option holdings as a measure of overconfidence, finding that CEOs who hold options until expiration are more acquisitive. They also use press coverage to measure overconfidence, finding that CEOs described as "confident" or "optimistic" are more likely to make acquisitions. The study shows that overconfident CEOs overestimate the value of mergers and underestimate the risks, leading to value-destroying deals. The market's negative reaction to these deals supports the overconfidence theory. The authors argue that overconfidence is an important determinant of merger activity and that overconfident CEOs are more likely to conduct mergers when they have internal financing options. The study provides empirical evidence that overconfidence influences merger decisions and market reactions.