Exploring Chief Executive Officer Overconfidence and Merger and Acquisition Deal Characteristics

Annalien de Vries; Suzette Viviers; Kaelin Louw

doi:10.25159/1998-8125/20833

Authors

Annalien de Vries Stellenbosch University https://orcid.org/0000-0001-8226-5368
Suzette Viviers Stellenbosch University https://orcid.org/0000-0003-1512-6100
Kaelin Louw Stellenbosch University https://orcid.org/0009-0003-5847-4049

DOI:

https://doi.org/10.25159/1998-8125/20833

Keywords:

mergers and acquisitions (M&As), chief executive officer (CEO), Longholder measure of overconfidence, Receptiviti measure of overconfidence, agency theory, upper echelon theory

Abstract

Purpose: Research shows that mergers and acquisitions (M&As) often fail, prompting interest in causes such as overconfident boards and chief executive officers (CEOs). Evidence from developed markets on CEO overconfidence and M&A deal characteristics is mixed. Relationships between CEO overconfidence and four deal characteristics (rationale, size, financing, and number of deals completed) were examined using data from 119 deals undertaken by South African listed companies between 2016 and 2023. South Africa has an active, regulated M&A market, boasting substantial domestic and foreign investor participation.

Methodology: CEO overconfidence was measured using the conventional Longholder measure and a novel proxy called the Receptiviti overconfidence measure. Data were collected from Bloomberg, the acquirers’ annual integrated reports, the South Africa Competition Commission, and other credible online sources.

Findings: Contrary to expectations, logistic and cross-sectional regressions reveal that overconfident CEOs preferred non-diversifying acquisitions. They also completed significantly more deals during their tenure than their non-overconfident peers did. The agency and upper echelon theories explain the findings and provide insights for stakeholders.

Practical Implications: For serial acquirers, effective monitoring by truly independent non-executive directors is crucial to ensuring that CEO-driven acquisitions contribute to long-term value creation rather than empire-building. The incentive compensation of serial acquirers should be based on deal completion and long-term performance rather than short-term performance metrics.

Author Biographies

Annalien de Vries, Stellenbosch University

Annalien de Vries (PhD) is the chair of the Financial Management focal area of the Department of Business Management at Stellenbosch University, South Africa. She teaches Financial Management at the postgraduate and undergraduate levels and has presented guest lectures at multiple international universities. She provides research supervision to post-graduate students in her areas of expertise which include corporate finance aspects, corporate social responsibility and behavioural finance.

Suzette Viviers, Stellenbosch University

Suzette Viviers is a professor in the Department of Business Management at Stellenbosch University. She teaches undergraduate and postgraduate modules in Financial Management and has published widely on topics such as ethical and sustainable investing, shareholder activism, impact investing, board independence, broad-based black economic empowerment, gender diversity, family businesses and the dividend payout puzzle. She was Secretary General of the Business Ethics Network of African (2010-2012), member of Stellenbosch University’s Research Ethics Committee (2010-2016), trustee of the Stellenbosch University Pension Fund (2017-2019) and chairperson of the Financial Management focal area (2021-2024).

Kaelin Louw, Stellenbosch University

Kaelin Louw is a Business Management graduate from Stellenbosch University, where she completed her Master of Commerce degree. Her thesis examined the relationship between selected deal characteristics of mergers and acquisitions and chief executive officer overconfidence from a South African perspective.

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