CEO overconfidence and acquisitiveness in cross-border and diversifying acquisitions

This paper studies the effect of CEO overconfidence on the decision to pursue cross-border and diversifying acquisitions. Using a sample of CEOs from US firms over the period from 2006 to 2018, we perform a Poisson regression with random effects to study the relationship between CEO overconfidence and their acquisitiveness. We find evidence of a heightened acquisitiveness in overconfident CEOs for both cross-border and diversifying acquisitions. We contribute to the literature by confirming and extending previous findings on the heightened acquisitiveness of overconfident CEOs to cross-border and diversifying acquisitions. We also study the moderation effects of cash flow and CEO power on this relationship. Surprisingly, cash flow and CEO power seem to minimise the effects of CEO overconfidence on their acquisitiveness. Further research may be necessary to test the robustness of our results. In particular, the construction of a commonly accepted and extensive measure of CEO power would lead to great advancement in this field of research. Then, we explore the mediation effect of CEO overconfidence on the relationships between firm size, CEO age and CEO acquisitiveness. We find novel evidence of a partial mediation of CEO overconfidence for firm size while indirect-only mediation effects are identified for CEO age. Lastly, we combine mediation and moderation analyses in a single moderated mediation model. We add nuance to our previous results and define under which conditions partial mediation of firm size via CEO overconfidence occurs. We find evidence that the mediated relationship is weaker under high cash flow for diversifying acquisitions, and stronger under low CEO power for cross-border acquisitions. Our results have implications for organisational design and governance. It emphasises the importance to put in place mechanisms to keep CEOs in check and help mitigating the pursuit of projects solely driven by overconfidence to avoid destroying shareholder value.

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