Chapter 16. Corporate Takeovers and the Winner's Curse

Author: Shefrin, Hersh

Source: Beyond Greed and Fear, October 2002 , pp. 227-239(13)

Publisher: Oxford Scholarship Online Monographs

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Abstract:

There is general evidence that corporate executives exhibit hubris, that they are impressed with their own abilities. Since July 1996, the Financial Executives Institute and Duke University have been jointly surveying corporate executives on a quarterly basis. During the first two years of the survey, executives of companies whose stocks are publicly traded have consistently indicated that their companies were undervalued. Corporate decisions offer ample examples of heuristic-driven bias and frame dependence. In this chapter, I discuss several: excessive optimism, the illusion of control, gambler's fallacy, and loss aversion—the tendency to throw good money after bad. However, the primary bias involved in corporate takeovers is hubris, because it leads to the phenomenon of winner's curse, where the acquiring firm overpays for the target. The chapter describes the takeover of computer maker NCR by American Telephone and Telegraph (AT&T).

Keywords: hubris; overconfidence; mergers and acquisition; AT&T; aversion to a sure loss; takeover; NCR; acquirer; target

Document Type: Research article

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