Darryl Laws

 The ‘better than average’ effect also affects the attribution of causality. Because

individuals expect their behavior to produce success, they attribute outcomes to their actions when they succeed and to bad luck when they fail (Miller and Ross, 1975; Feather and Simon, 1971). This self-serving attribution of outcomes reinforces overconfidence. They find that overconfident CEOs are more likely to pursue acquisitions when their firms have abundant internal resources. They further report that overconfident CEOs are significantly more likely than other CEOs to undertake a diversifying merger. Finally, they observe that overconfident CEOs use cash to finance their mergers more often than other CEOs who leverage their company’s stock as if it were a check book.

Malmendier and Tate (2008) examine the extent to which overconfidence can help to explain merger decisions and various characteristics of the deal itself. They find that overconfident CEOs are more likely to pursue acquisitions when their firms have abundant internal resources. They further report that overconfident CEOs are significantly more likely than other CEOs to undertake a diversifying merger. Finally, they observe that overconfident CEOs use cash to finance their mergers more often than other CEOs.

The literature surveyed does not investigate the effect of CEO overconfidence

on international merger and acquisition transactions. With the exception of

Doukas and Petmezas (2007), existing studies only examine overconfidence in

the context of U.S. mergers and ignore international transactions. Managerial overconfidence is shaped in part by national cultures, I expect that the dispersion of overconfidence among CEOs will vary from country to country. As noted by La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998), (1999), (2000), Stulz and Williamson (2003), Doidge, Karolyi, and Stulz (2007), and Griffin, Lai, Yue, and Zhao (2009), national culture involves dimensions such as language, religion, and legal heritage. These factors can be expected to influence the extent to which overconfidence affects managerial decision making. Consequently, national cultures are likely to be important for an understanding of how overconfidence is related to global merger activity.

Asymmetrical vs. Symmetrical Information in M&A. Lying for strategic advantage about planned actions, or intentions, is a common feature of mergers and acquisitions transactions. Such lying frequently takes the extreme form of active misrepresentation, as opposed to less than full, honest disclosure. (Crawford, 2001). An example is former President George H. W. Bush's regrettably 1988 campaign promise, "Read my lips: no new taxes”. (Royko, 1988). This example has two common features; 1) it involves misrepresentation via agreements, statements, or non-statements that in themselves have little or no direct costs and 2) all involve situations in which the parties have predominantly conflicting interests, so that successful deception benefits the deceiver only at the expense of the deceived. The example’s common features suggest that they can be modeled as communication via costless messages, ("cheap talk"), in a zero-sum two-person game. But in such a model costless messages must be ignored in equilibrium: If a player could benefit by responding to the other player's message, his response would hurt the other player, who would therefore do better to make his message uninformative. (Crawford, V., 2001). Thus, in equilibrium no information is conveyed by the message, but neither is anyone fooled by it.  Equilibrium is defined as a combination of decision rules or strategies, one for each decision maker or player, in which each player’s strategy maximizes her/his personal expected utility or payoff given the strategies of others who are deciding in the same way. The generality, tractability, and precision of equilibrium analysis have made it the method of choice in most economic applications of game theory (Myerson 1999). Note: A zero-sum game is one in which the players' interests are in direct conflict, e.g. in football, one team wins and the other loses; payoffs sum to zero. 

Darryl Laws