The Effect of Founder-CEO Overconfidence on Merger Premium (PDF)

Master's Thesis from the year 2014 in the subject Business economics - Investment and Finance, grade: 1,0, Heriot-Watt University Edinburgh (Finance), course: Corporate Finance, language: English, abstract: Theoretical and empirical research has indicated that overconfidence affects merger decision-making and merger premium. However, founder-CEOs have not been subject of such a study, yet. This lack is particular surprising when considering the differences between founder and manager-CEOs as well as the media attention of founder-CEOs. The present dissertation aims to fill the research gap through investigating the effect of founder-CEO overconfidence on merger premium in the high-tech industry. Moreover, this dissertation aims to extend the literature by including target CEO overconfidence and studying the impact on merger premium when both, acquirer and target CEO are overconfident. By studying founder-CEOs this dissertation also aims to establish the effectiveness of founders as CEOs. The resource-based perspective argues that while founders help in the early years of the company, they become less effective as the firm evolves, since they lack the necessary management skills.

Design/methodology/approach - Using ordinary least square (OLS) technique, this study investigates the effects of implemented factors in determining the merger premium paid in high-tech acquisitions. A sample consisting of 245 acquisitions in the high-tech industry of 124 CEOs during a 19-year period (1995 to 2013) has been observed. In order to test the founder-CEO effects, this dissertation develops a matched sample approach of 62 founder-CEOs and 62 manager-CEOs.

This study shows a strong relationship between CEO overconfidence and acquisitions premium paid. The results suggest that the CEO overconfidence may provide an explanation for the well-rehearsed overpayment problem. An additional analysis indicates that the highest premium is paid when combined acquiring and tar-get firm CEO overconfidence exist. The dissertation also shows that founder-CEOs pay higher premia than manager-CEOs in the high-tech industry. It has been proven that founder-CEOs' decisions are more independent from interventions of the board of directors and that founder-CEO overpayment is not dependent on the company's size or relatedness of mergers. The findings are reliable as the results remain constant for applied robustness tests.