Essay On Managerial Hubris

Management hubris

The hypothesis of management hubris is first proposed by Roll (1986), he argue that managerial hubris is a possible explanation of value-destroying M&A activity. As for the company merger and acquisition activity, managers carry out the unprofitable takeover because they overestimate the value created by the takeover (Hietala, Kaplan, and Robinson, 2003; Baker, Ruback and Wurgler, 2004). Barney and Hesterly (2008) define management hubris as “the unrealistic belief held by managers in bidding firms that they can manage the assets of a target firm more efficiently than the target firm’s current management”. Malmendier and Tate (2008) suggest that the overconfidence of manager on the M&A is the excessive confidence that the

CEO’s dominance refers to the power of the CEO to impose his/her overconfidence views or attitudes into the acquisition decision (Brown and Sarma, 2007). Using M&A activity of Australian company between 1994-2002 as sample, Brown and Sarma (2007) find out that the effect of CEO dominance is as significant as that of CEO overconfidence in the acquisition decision. Jensen and Zajac (2004) use CEO duality and relative tenure power to measure the power of CEO and its relationship with M&A, and argue that CEO dominance is negatively related to the shareholder return after the M&A. Hambrick and Daveni (1992) propose a measurement for the CEO’s dominance that using the CEO’s remuneration divided by that of other officers, and they argue that compared with the matching group, the proportion of CEO’s payment is significantly higher for bankrupt firms. Fast et al (2011) investigates the relationship between manager’s power and confidence, and find out that the power of CEOs lead them to overestimate their ability and

The textual analysis of corporate disclosure is able to provide insights into managerial expectations and caveats the fact that are hard to be observed by financial measures (Loughran and McDonald, 2015). There is extensive literature on textual research in accounting and finance, which has addressed a wide variety of types of disclosure by companies. In this paper, I plan to mainly discuss varies textual analysis studies related to the company’s M&A performance. As suggested by Loughran and McDonald (2016), textual analysis can be divide into two aspects: content analysis and sentiment analysis. Content analysis refers to the analysis volume of specific content included in a document. Sentiment analysis focus on classifying the polarity of certain word, sentence or document into three categories: positive, negative, or neutral. In general, content analysis focus on the proportion of specific content in a document while sentiment analysis focus on the polarity contained in certain