Managerial Overconfidence in High and Low Valuation Markets and Gains to Acquisitions

In this paper we empirically investigate bidders ’ performance managed by overconfident and non-overconfident managers in high and low valuation periods. Using a sample of UK acquisitions in the period 1990-2005, we provide evidence that the interaction between market valuation and different behavioral traits of managers is a key determinant of bidders ’ announcement returns. In particular, we provide evidence that, in contrast to overconfident managers, non-overconfident managers conduct value-creative acquisition deals in all valuation periods. In addition, when we control for acquirer and deal characteristics, we find that bidders with non-overconfident managers gain the most in high valuation periods, while firms are better off without overconfident managers in any type of market conditions