| Recent years have seen an increase in the number and value of mergers and acquisitions announced. However, research shows that the abnormal returns of these announcements are frequently negative or neutral for the acquiring firm. Negative abnormal returns indicate the acquiring firm overpaid for the target. Several reasons have been proposed why acquiring firms may over-value a target. In this dissertation I focus on the role of managers in the acquisition valuation decision process. Building from research in the strategic choice tradition and the behavioural decision theory literature, I investigate how managerial characteristics may influence target valuations. Specifically, I examine how the illusion of control may lead managers to base estimates of value on factors such as past performance and his or her industry familiarity. Using a sample of 135 acquisitions announced in 1994 and 1995 by and of publicly traded firms, I model the impact of the managers' prior performance, relative pay, target industry expertise and uncertainty on the premium bid. These models indicate that prior performance and industry expertise have a direct impact on the size of premia bid, as does one form of uncertainty. In addition, the level of uncertainty moderates the relationship between these independent variables and the premia bid. However, no evidence is found linking the size of premia and the post-announcement abnormal returns. The implications of these findings for acquiring firms, the study of acquisition behaviour and the study of managerial decision making in general are discussed. |
