Does CEO overconfidence matter for shareholders’ wealth? Evidence from the UK takeover market

This study examines how CEO overconfidence affects shareholders’ wealth (e.g., stock returns) in Merges and Acquisitions (M&As). The main measure adopted to link CEO overconfidence is based on whether a CEO holds stock options until the year before the expiration date. Using a sample of M&As in the UK, we document that acquiring firms’ stock returns are negatively affected around the announcement date if their CEOs are characterized by overconfidence. The results hold after addressing omitted variable concerns and using a propensity score matching (PSM) analysis. The findings are also robust to the implementation of the alternative measure of managerial overconfidence, such as media portrayal of CEOs. This study offers an important implication for firms to mitigate CEO overconfidence in order to protect the interests of shareholders.