Hubris theory of merger and acquisition PDF

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The Hubris theory The theory of managerial hubris (Roll, 1986) was proposed by Richard Roll, who postulated that managers may have good intentions in increasing their firm’s value but, being over-confident; they over-estimate their abilities to create synergies. The Hubris theory constitutes a psychological based approach to explain M&As. It states that the management of acquiring firms over rates their ability to evaluate potential acquisition targets. The hubris theory states that when a merger or acquisition announcement is made, the shareholders of the bidding firm incur a loss in terms of the share price while those of the target firm generally enjoy a contrary effect. The prime reason behind this is that when a firm announces a merger offer to the target, the share price of the target firm increases because shareholders in the target firm are ready to transfer shares in response to the high premium that will be offered by the Acquiring firm, (Machiraju, 2010).The risk of potential failure, due to overrated acquisition price which significantly exceeds the fair value of the target company, increases in an auction. Critics of the Theory 1. The hubris hypothesis is not supported by the analysis of the joint impact of the uphill movement of the target’s stock and the downhill movement of the acquirer’s stock. Before two companies merge and acquire another, there should a proper analysis and several approval stages that has to be met for example undertaking independent valuation of the target. 2. There is no systematic and reliable approach than relying merely on subjective judgments and gut instincts is does difficult to a hubristic leadership research. Other empirical studies 1. The Chief executive Officer Hubris. The theory of CEO hubris can be considered as an antecedent or consequence when a CEO over-estimates by overly taking the extreme risk of a decision because of their characteristics of being arrogant and selfconceit (Roll, 1986). Also, the theory of CEO hubris can be considered as a consequence when antecedents of an overconfident CEO forms due to their initial success (Doukas & Petmezas, 2007). Also, when a CEO who becomes a celebrity

through mass media (Clapham and Schwenk, 1991). Lastly when a CEO with a high characteristic of narcissism of self-love (Hiller & Hambrick, 2005, Duchon & Drake, 2009) are initially involved. 2. Habris theory of entrepreneurship-This models how more overconfident investors are more likely to initiate and incorporate ventures at uncertain environment. Greater overconfidence provide the founders with bravado to undertake and persist with more challenging tasks and the conviction that that they will have necessary resources for the ventures to succeed, (Cialdin 1998). 3. In another study by Billett and Qian further studied this using the acquisition history of 2,487 CEOs and 3,795 deals over the years 1980–2002. CEOs with a positive experience with acquisitions were more likely to pursue acquisitions. The net purchases of their company’s own stock were higher. Before the next series of deals than they were before the first deals. This result was interpreted as the CEOs being overconfident and attributing the success of the original deal to their own managerial abilities and superior insight. 4. A study by Dodd concluded that statistically significant negative returns to the acquirer after the announcement of the planned takeover. Other studies have similar results, although there are others that demonstrate the opposite. For instance, Paul Asquith failed to find a consistent pattern of declining stock prices following the announcement of a takeover. 5. In a study by Bradley, Desai, and Kim, tender offers led to gains for target firm stockholders. There is more proof of positive price effects for target stockholders who experienced wealth gains after takeovers. Greater changes should be produced by the hostile nature of tender offers in the stock price than friendly takeover offers. But most studies show that target stockholders gain following both friendly and hostile takeover bids. 6. Bidders tend to overpay, according to a study by Varaiya. The relationship between the bid premium and the combined market values of the bidder and the target was

examined. The results demonstrated that the premium paid by bidders was too immense relative to the worth of the target to the acquirer. 7. The managerial over optimism typically results in erroneous decisions which are overpriced (Trautwein 1990). 8. Over-confidence increases the probability of overpaying (Hayward and Hambrick, 1997; Malmendier and Tate, 2008), and may leave the winning bidder in the situation of a winner's-curse which dramatically increases the chances of failure 9. (Dong, 2006), In an auction environment the winning bid is usually in excess of the estimated value of the target company and is likely to represent a positive valuation error. The positive valuation error represents the ‘winners curse’. The winner is cursed in the sense that he paid more than the company’s worth. In particular. 1. Loch (2016) 2. argued that hubris is the ‘tail end of a normal psychological trait, status seeking and nar3. cissism’ rather than a medical syndrome, using the analogy that just like height is not a 4. medical syndrome but extreme height can cause medical problems 5. Loch (2016) 6. argued that hubris is the ‘tail end of a normal psychological trait, status seeking and nar7. cissism’ rather than a medical syndrome, using the analogy that just like height is not a 8. medical syndrome but extreme height can cause medical problems 9. Loch (2016) 10. argued that hubris is the ‘tail end of a normal psychological trait, status seeking and nar11. cissism’ rather than a medical syndrome, using the analogy that just like height is not a 12. medical syndrome but extreme height can cause medical problem 13. Loch (2016) 14. argued that hubris is the ‘tail end of a normal psychological trait, status seeking and nar15. cissism’ rather than a medical syndrome, using the analogy that just like height is not a 16. medical syndrome but extreme height can cause medical problem 17. Loch (2016) 18. argued that hubris is the ‘tail end of a normal psychological trait, status seeking and nar19. cissism’ rather than a medical syndrome, using the analogy that just like height is not a 20. medical syndrome but extreme height can cause medical problem 21. Loch (2016) 22. argued that hubris is the ‘tail end of a normal psychological trait, status seeking and nar23. cissism’ rather than a medical syndrome, using the analogy that just like height is not a 24. medical syndrome but extreme height can cause medical problem 25. Loch (2016) 26. argued that hubris is the ‘tail end of a normal psychological trait, status seeking and nar27. cissism’ rather than a medical syndrome, using the analogy that just like height is not a 28. medical syndrome but extreme height can cause medical problem

29. Loch (2016) 30. argued that hubris is the ‘tail end of a normal psychological trait, status seeking and nar31. cissism’ rather than a medical syndrome, using the analogy that just like height is not a 32. medical syndrome but extreme height can cause medical problem Conclusion 1

It is crucial to overcome hubris in oneself to avoid damaging professional relationships. To overcome hubris, seek out knowledge that will assist in doing so, such as books and self-help guides.

2

Reforming thought patterns by considering the consequences hubris causes to others is an effective way to initiate positive changes. Hubris can be quelled by adequately bestowing praise and credit when working in a group setting.

3

Staying self-aware during periods of success. Be vigilant in remembering that current accomplishments do not mean that future hardships cannot occur.

References i.

Claxton G, Owen D and Sadler-Smith E (2014) Hubris in leadership: A peril of unbridled intuition? Leadership 11(1): 57–78.

ii.

Craig R and Amernic J (2014) Exploring signs of hubris in CEO language. In: Hart RP (ed.) Communication and Language Analysis in the Corporate World. Hershey, PA: Information Science Reference, pp. 69–88....