Journal of Business Research 165 (2023) 114026

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Journal of Business Research

journal homepage: www.elsevier.com/locate/jbusres

Board overconfidence in mergers and acquisitions☆

Torsten Twardawski *, Axel Kind
University of Konstanz, Department of Economics, Universitätsstraße 10, 78464 Konstanz, Germany

A R T I C L E I N F O A B S T R A C T

Keywords: Past research has shown that CEOs become overconfident through biased self-attribution in previous M&A
Board of directors transactions, which negatively affects subsequent M&A deals. However, M&A decisions are de jure and de facto
Corporate governance not only influenced by a single person, the CEO, but by a group of individuals, namely the board of directors. In
Group decision making
this study, we investigate whether and to what extent the overconfidence of board directors affects key acqui­
Mergers and acquisitions
Overconfidence
sition outcomes. Building on the overconfidence literature, we argue that board directors become overconfident
Self-attribution bias through biased self-attribution in recent M&A deals and hypothesize that their overconfidence leads to poorer
subsequent M&A outcomes. By studying investor reactions and premiums paid for a broad set of public acqui­
sitions carried out by large U.S. companies, we find strong support for our predictions.

1. Introduction
A substantial body of research has consistently shown that CEO
overconfidence1 reduces the quality of corporate takeover decisions
because overconfident CEOs tend to overestimate their ability to create
value in mergers and acquisitions (M&A)2 (see, e.g., Billett and Qian,
2008; Devers et al., 2013; Doukas and Petmezas, 2008; Hayward and
Hambrick, 1997; Malmendier and Tate, 2005, 2008; Renneboog and
Vansteenkiste, 2019; Roll, 1986; Zollo, 2009). Findings in the field of
experimental and social psychology indicate that overconfidence is not a
stable individual trait but may arise over time through biased self-
attribution (e.g., Alicke et al., 1995; Griffin and Tversky, 1992; Langer
and Roth, 1975; Menkhoff et al., 2013; Miller and Ross, 1975; Weinstein,
1980). In particular, individuals tend to attribute positive outcomes to
their ability, but ascribe failures to external circumstances, leading them
to overestimate their own competences in future decisions. Accordingly,
scholars have shown that CEO overconfidence emerges through recent
prior experience in M&A deals, and leads to poor decisions in subse­
quent corporate transactions (Billett and Qian, 2008; Doukas and Pet­
mezas, 2008; Zollo, 2009).
While prior research has helped us understand how CEO over­
confidence can affect decision-making in organizations, it has focused
on one individual decision maker. However, important strategic de­
cisions in organizations, such as M&A deals, are made by a group of

☆
We thank Jens C. Jackwerth, Michael Jensen, Tomi Laamanen, Jim Westphal, Nadja Younes, seminar participants of the University of Konstanz, participants of
the European Financial Management Conference 2016, and participants of the Academy of Management Annual Meeting 2016 for their constructive comments on
earlier drafts of the paper. We also thank the editor of the Journal of Business Research, Xinming He, and anonymous referees for their detailed comments and
suggestions that lead to improvements of the paper.
* Corresponding author.
E-mail addresses: torsten.twardawski@uni-konstanz.de (T. Twardawski), axel.kind@uni-konstanz.de (A. Kind).
1
In this paper, we use the term “overconfidence” and not “hubris” – as initially used by Roll (1986) and Hayward and Hambrick (1997) – although both terms
could be used interchangeably. In fact, overconfidence has multiple synonyms among which are “illusory superiority,” the “above-average effect,” “superiority bias,”
“leniency error,” “sense of relative superiority,” the “primus inter pares effect,” and the “Lake Wobegon effect.”
2
Although the term “acquisition” suggests a hostile character, while “merger” is sometimes used to describe a friendly consolidation between two firms, we follow
extant literature and use both expressions interchangeably. We also refer to them as “M&A deals” or “corporate takeovers.”

https://doi.org/10.1016/j.jbusres.2023.114026
Received 31 May 2021; Received in revised form 2 May 2023; Accepted 7 May 2023
Available online 22 May 2023
0148-2963/© 2023 Elsevier Inc. All rights reserved.
T. Twardawski and A. Kind
board directors.3 So far, the importance of board directors’ over­
confidence in M&A transactions has not been considered, and merits a
change of perspective from the CEO to the board of directors due to the
distinctly different advisory and monitoring tasks performed by board
directors (see, e.g., McDonald et al., 2008) and the group decision
dimension (Meissner et al., 2018). In particular, legislators around the
world typically confer to the board of directors – and not to the CEO –
the non-transferable and irrevocable monitoring responsibility of
approving large M&A transactions.4 Since board decisions, such as
mergers and acquisitions, typically follow a voting procedure in which
each member has one vote, decisions must be approved by more than
half of the group of board directors and are not an individual decision by
the CEO. While early work in psychology claims that groups perform
better than individuals in a wide set of tasks because they are able to self-
correct and avoid errors (see, e.g., Kerr and Tindale, 2004, for a review),
behavioral biases of individual group members have been shown to
survive checks and balances in groups and negatively affect groups and
their decision-making – including in organizations and especially in
boardrooms (see, e.g., Cheng et al., 2021; Meikle et al., 2016; Tindale,
1993; Westphal and Bednar, 2005; Zhu, 2013). Although a large body of
research has analyzed overconfidence on the individual level, little is
known about how the individual bias affects teams at the group level
(see e.g., Meissner et al., 2018; Schuldt et al., 2017). In particular, it is so
far unclear how overconfidence of individual board directors manifests
at the board level and affects the outcome of the group’s decision-
making.
This paper aims at filling this research gap and studies whether and
how the overconfidence of board directors affects the outcomes of M&A
decisions, and whether this effect is distinct from and adds to the
documented influence of CEO overconfidence. We draw on the psy­
chology and overconfidence literature (e.g., Alicke et al., 1995; Billett
and Qian, 2008; Doukas and Petmezas, 2008; Langer and Roth, 1975;
Malmendier and Tate, 2008; Miller and Ross, 1975) and argue that an
individual director’s overconfidence is based on biased self-attribution
in prior M&A experience. We then hypothesize how board directors’
overconfidence influences acquisition outcomes. To empirically test the
validity of our predictions, we analyze investor reactions, acquisition
premiums, and insider trading related to 468 public deals carried out by
publicly traded U.S. firms in the period 2009–2013.
We aim to contribute in several ways to the extant literature on
corporate boards, mergers and acquisitions, and overconfidence. First,
we follow a call from board scholars (cf. Hambrick et al., 2008; Johnson
et al., 2013) and add to the understanding of the role of directors’
3
In this paper, board directors are the members of the organization’s board.
Board directors are heterogenous and can be classified along a number of
different dimensions. Importantly, they may be categorized by the presence or
absence of relationships to the organization. They can be inside directors – who
are connected to the organization such as employees or the chief executive
officer – or outside directors – who are not otherwise employed by (or engaged
with) the organization. Additionally, directors may assume specific roles within
the board, e.g., by chairing the board or by chairing or simply being part of
certain committees (audit, risk, nomination, compensation, governance, sus­
tainability, etc.), and have specific characteristics, e.g., with respect to gender,
nationality, financial background, industry experience, etc. In the study, we do
not distinguish between director types within the board because we investigate
the influence of director overconfidence on M&A transactions, a behavioral bias
that influences the decision-making of all directors independent from their
duties and responsabilities. Also, all directors have one vote and thus the same
voting power in the M&A decision-making processes.
4
For example, the Delaware General Corporate Law states that the “board of
directors of each corporation which desires to merge or consolidate shall adopt
a resolution approving an agreement of merger or consolidation and declaring
its advisability” (Title 8, §251, lit. b, DGCL).
2
Journal of Business Research 165 (2023) 114026
behavioral biases in strategic decision-making. While the consequences
of CEO overconfidence on the quality of strategic decisions, such as
corporate takeovers, have been extensively investigated (e.g., Billett and
Qian, 2008; Hayward and Hambrick, 1997; Malmendier and Tate, 2008,
2015; Roll, 1986), this article is, to the best of our knowledge, the first to
study the effect of board directors’ overconfidence on takeover de­
cisions. As board directors and CEOs differ along important dimensions,
our study does not simply extend known effects related to CEO over­
confidence. Unlike CEOs, who have exclusively executive functions,
board directors also perform monitoring and advising functions (see, e.
g., Bainbridge, 2002; McDonald et al., 2008). In this respect, this paper
contributes in disentangling the effects of board directors’ over­
confidence from those of CEO overconfidence. Thus, it explicitly ad­
dresses the problem highlighted by Westphal and Fredrickson (2001)
that in many empirical studies CEO effects may actually mask board
effects. In addition, we add to the understanding of how well board
directors carry out their fiduciary duties in the presence of a behavioral
bias. Second, related studies only focus on managerial overconfidence
that is based on prior firm-specific M&A transactions (see, e.g., Billett
and Qian, 2008; Hayward and Hambrick, 1997). However, since board
directors often have additional mandates as executives (CFOs or CEOs)
or as board members in other companies (that also conduct M&A
transactions), they are involved in corporate transactions inside the firm
as well as outside the firm and thus, they can develop overconfidence
both inside and outside the firm. Literature has shown that it is impor­
tant to consider such spillover effects, as they can even be stronger than
local effects (see, e.g., Jensen et al., 2022). Third, while most studies
focus on static characteristics of board directors that affect their decision
quality, this paper shows that overconfidence is time-varying, i.e., dy­
namic, and also influences a director’s effectiveness (see, e.g., Hambrick
et al., 2008; Johnson et al., 2013, for reviews). Finally, our results
suggest that scholars should also focus on previously unexplored char­
acteristics of board members, such as behavioral biases, when studying
the quality of strategic decisions.
2. Theoretical background and hypotheses
2.1. Overconfidence triggered by biased self-attribution
Overconfidence is generally defined as a human characteristic that
leads individuals to have a subjective confidence in a judgment that
exceeds its objective accuracy (see, e.g., Klayman et al., 1999). Over­
confidence becomes apparent when individuals overestimate their
skills, rely too heavily on their prior experience, or overvalue the pre­
cision of their private information (see Moore and Healy, 2008, for a
review). Rather than being a stable individual trait, such as one of the
“Big Five” personality traits, i.e., openness, conscientiousness, extra­
version, agreeableness, and neuroticism (McCrae and Costa, 1987),
overconfidence emerges, evolves, and disappears dynamically over
time. In an early study on clinical decisions made by professional psy­
chologists, Oskamp (1965) showed that the individual confidence in
judgments increases as more information about patients is released,
whereas the objective accuracy does not. Later studies in the field of
social psychology argue that changes in individual overconfidence can
be traced back to a positive self-attribution (Alicke et al., 1995; Langer
and Roth, 1975; Miller and Ross, 1975).
According to the self-attribution theory, individuals tend to be biased
in their causal attribution of personal outcomes because they have a
desire for self-enhancement via positive self-presentation and mainte­
nance of self-esteem. They take personal credit for positive events (in­
ternal attribution), but deny responsibility for failures by ascribing them
to external factors (external attribution). This self-attribution bias oc­
curs when individuals (i) suffer from an illusion of control (Kahneman
T. Twardawski and A. Kind
and Lovallo, 1993; Langer and Roth, 1975; Weinstein, 1980),5 (ii) have
prior experience in the relevant task (Griffin and Tversky, 1992; Menkhoff
et al., 2013; Weinstein, 1980),6 (iii) are highly committed to the outcome
(Nisbett and Ross, 1980; Weinstein, 1980),7 and if they have to deal with
(iv) difficult tasks (Dunning et al., 2004; Lichtenstein and Fischhoff,
1977) or (v) rare and not resembling events (Brehmer, 1980; Dunning
et al., 2004).8
2.2. Overconfidence and corporate takeover
Corporate directors who are involved in the development of the
corporate strategy (e.g., those who have to deal with takeover decisions)
are particularly prone to developing overconfidence because they meet
several of the above-mentioned conditions that are known to trigger
biased self-attribution. They perceive a high level of control over a firm’s
risk and performance (Kahneman and Lovallo, 1993; March and Sha­
pira, 1987), but they underestimate the actual risk taken, especially in
the context of mergers and acquisitions (Lubatkin and O’Neill, 1987).
Moreover, they are highly committed to firm success because of their
compensation, their desire to keep a good reputation, and their personal
responsibility in the decision to acquire a particular target (Haunschild
et al., 1994; Malmendier and Tate, 2008).
Overconfidence already occupies a prominent role in explaining
deviations from rational behavior in corporate takeovers. Malmendier
and Tate (2008) argue that overconfident CEOs believe they can manage
a particular target better than the incumbent management and seek to
generate excess returns by acquiring firms and replacing their man­
agement. However, numerous studies show that this belief leads firms to
overpay for targets and to display negative acquisition performance
(Hayward and Hambrick, 1997; Malmendier and Tate, 2008; Roll,
1986).
Consistent with research on biased self-attribution, scholars show
that being involved in multiple corporate transactions causes managers
to become overconfident after a first deal, which imperils the outcome of
subsequent deals (Billett and Qian, 2008; Doukas and Petmezas, 2008;
Haleblian and Finkelstein, 1999). They argue that a CEO’s estimate of a
first-deal value is generally unbiased and therefore leads, on average, to
a successful transaction. Unfortunately, whenever a task is particularly
difficult (Langer and Roth, 1975), as in the case of M&A deals, positive
self-attribution induces overconfidence. Thus, overconfidence emerges
because the CEO takes personal credit for an initial success regardless of
5
Illusion of control means that the expectation of the probability of a per­
sonal success is higher than the objective probability (Langer and Roth, 1975, p.
313). According to Kahneman and Lovallo (1993), “managers commonly view
risk as a challenge to be overcome, and believe that risk can be modified by
‘managerial wisdom and skill.’” Thus, if they can modify the risk, they attribute
it to their managerial wisdom and skills. However, if the managers cannot
modify the risk, they ascribe the failure to external factors because they claim
nonetheless to have the necessary skills.
6 exhibit overconfidence, while their subsequent experiences, as a whole,
Individuals with prior experience in a specific task (e.g., mergers and ac­
quisitions) may think that they are more experienced than others, and this may
reinforce their overconfidence (Doukas and Petmezas, 2008; Weinstein, 1980)
because they attribute a group’s success in a follow-up task to their own prior
experience, and failure to the inexperienced group members.
7
If individuals are highly committed to an outcome, the likelihood of self-
protection in the event of failure is high. In case of high commitment, in­
dividuals contribute more than average to success. In the event of success, they
attribute the success to their massive investment. In times of failure, they
attribute the outcome to external factors because they contributed more than
average to the endeavor.
8
When dealing with difficult tasks and rare events, it is particularly difficult
to define which outcomes are good and which are bad; or even what is good and
what is less good about a given result. Because accurate assessments and in­
ferences from learning are more difficult in such situations, it is much easier to
project good aspects onto oneself and bad aspects onto other circumstances
(Brehmer, 1980).
3
Journal of Business Research 165 (2023) 114026
the actual outcome and ability. In fact, even if the first deal cannot be
viewed as a success based on objective grounds, managers likely over­
rate their ability and the experience gained in these first acquisitions
(Haleblian and Finkelstein, 1999; Heimeriks, 2010). Indeed, based on
questionnaires, Zollo (2009) reveals that the large number (and the
fuzziness) of possible metrics to measure the quality of a deal (e.g., cost
reductions, revenue growth, customer satisfaction, employee retention,
etc.) enable managers to perceive an acquisition almost always as suc­
cessful on at least one dimension.
Overconfidence through biased self-attribution can be reflected in a
high acquisitiveness, i.e., frequent acquisitions, because overconfidence
leads managers to overrate their ability to manage new targets and
create valuable synergies (Doukas and Petmezas, 2008; Malmendier and
Tate, 2005). As a consequence, overconfident managers are more likely
to win a bidding contest (and are therefore more frequent acquirers)
because they are willing to pay more for a target than less confident
managers (Heath and Tversky, 1991). Although overconfidence trig­
gered by a previous transaction may decrease over time if managers start
evaluating their prior deals and their true abilities on objective grounds
(Billett and Qian, 2008; Haleblian and Finkelstein, 1999), previous
literature argues that a high acquisitiveness, i.e., conducting a series of
deals in a short period of time, is not necessarily the result of insightful
analysis (Doukas and Petmezas, 2008; Haunschild, 1994; Hayward,
2002; Malmendier and Tate, 2005; Peng and Fang, 2010). In particular,
although managers gain beneficial acquisition experience in the long
run (McDonald et al., 2008), the literature suggests that a high acquis­
itiveness is unlikely to be due to immediate learning about one’s actual
abilities. High acquisitiveness may rather indicate overconfidence, i.e.,
overestimation of the manager’s own expertise (Billett and Qian, 2008;
Doukas and Petmezas, 2008; Malmendier and Tate, 2005). Since over­
confident managers may often feel an over-exuberance to acquire
(Jemison and Sitkin, 1986), they may even ignore conclusions drawn
from prior acquisitions, particularly if those inferences raise doubts
about the merits of the focal acquisition (Doukas and Petmezas, 2008).
In addition, Chen et al. (2015) theorize and show that overconfidence
does not necessarily disappear through feedback. In particular, over­
confident managers are more inclined to ignore corrective feedback. The
findings suggest that managers who acquire frequently – which likely
indicates overconfidence – are less inclined to learn immediately from
M&A experience.
In fact, several studies aim to offer a fine-grained view on the rela­
tionship between M&A experience and learning (see, e.g., Anand et al.,
2016; Barkema and Schijven, 2008, for a review; Ellis et al., 2011)9 and
argue that overconfidence developed through experience might be
mitigated when managers get feedback and start reflecting on (and
learning from) past acquisitions (Arkes et al., 1987). However, as noted
by Billett and Qian (2008, p. 1039), it is still unclear “… whether and/or
when experience eliminates overconfidence. While the exact relation
between experience and overconfidence is not perfectly clear, self-
attribution bias predicts that individuals’ first experiences should not
will.”
To sum up, in this paper we follow the notion that overconfidence is
not a stable individual trait but develops due to biased self-attribution in
recent prior M&A experiences (Camerer, 1995; Gervais and Odean,
2001; Hirshleifer, 2001).10 Moreover, we use high acquisitiveness
9
As specifically argued by Barkema and Schijven (2008), acquisitions are
long-term corporate strategies and their complex consequences require several
years to be understood, also because synergy effects strongly depend on stra­
tegic decisions made going forward.
10
According to Hirshleifer (2001, p. 1549), “Overconfidence and biased self-
attribution are static and dynamic counterparts; self-attribution causes in­
dividuals to learn to be overconfident rather than converging to an accurate
self-assessment.”
T. Twardawski and A. Kind
within a short span of time to identify overconfidence.
2.3. Board directors‘ overconfidence and corporate takeovers
Similar to CEO overconfidence, we expect that the overconfidence of
board directors (i) arises from recent prior experience in M&A trans­
actions through biased self-attribution and (ii) affects subsequent M&A
deals. This is due to the following reasons.
First, state-level corporation acts assign board directors the re­
sponsibility on firm acquisitions and thus force them to be committed to
the outcome of such deals. According to the prevailing opinion of law
scholars, the board’s responsibility in corporate takeovers is so strong
that in the case of a disagreement with the CEO, the board’s authority
shall prevail (see, e.g., Bainbridge, 2002). In this respect, directors are –
and must feel – highly committed to the task of approving sensible M&A
deals.
Second, board directors perceive a high level of control by being in
charge of hiring and firing top executives, including the CEO, and also
by reviewing, ratifying, and consulting in strategic decisions, including
decisions on the expansion into new markets, the development of new
products, and growth by mergers and acquisitions (see, e.g., Carpenter
and Westphal, 2001; Judge and Zeithaml, 1992; Kor and Misangyi,
2008; Schwartz-Ziv and Weisbach, 2013; Westphal and Fredrickson,
2001, among others). In the case of corporate acquisitions, scholars
point out that board directors may not only approve deals proposed by
the management, but even propose their own targets (Forbes and Mil­
liken, 1999; Hillman and Dalziel, 2003; McDonald et al., 2008; West­
phal, 1999).
Third, laboratory experiments provide evidence that individual
overconfidence may arise more easily due to biased self-attribution in
group decisions, and need not be the result of an individual decision-
making process (Schlenker and Miller, 1977). Specifically, board di­
rectors are likely to take personal credit for positive dimensions of col­
lective board decisions on acquisitions, while they attribute failures, or
at least negative aspects of mergers, to a difficult market environment,
other board members, the CEO, or other top managers. Because board
directors, unlike other top managers, are less involved in the execution
and the post-merger integration process (Shrivastava, 1986) and are part
of a group, it is much easier for a board director than for a CEO to deny
responsibility for failures, which strengthens a director’s self-attribution
bias (Schlenker and Miller, 1977). Even if there is no clear positive
dimension to a deal or the directors have not substantially contributed to
the success of an acquisition, self-attribution predicts that they will
overrate their acquisition experience. The reason for this is that their
participation in the decision-making and voting process prior to winning
a bidding contest is mistakenly viewed as a positive learning effect and
certification.11
Finally, board directors often have additional mandates as executives
(CFOs or CEOs) or board members in other companies that are equipped
with decision-making power in M&A deals. Since all these companies
may conduct M&A transactions, board directors may be involved in even
more M&A deals compared to CEOs. Thus, they may have even more
opportunities to develop overconfidence through biased self-attribution
in prior M&A experiences, and, depending on the number of mandates,
they may also not have enough time for insightful analysis. In addition,
in all their deals, they are part of a group and can deny responsibility for
11
In this paper, we assume that overconfidence only arises when the board
director participates in a “successful” bidding contest, i.e., by winning the
contest and gaining experience. If the bid was unsuccessful, the theory of self-
attribution suggests that the director may attribute the failure to other
circumstances.
4
Journal of Business Research 165 (2023) 114026
failures (as previously argued). In this respect, directors may develop
overconfidence based on past experience in one company, which then
influences M&A decisions in another company.
The internal discussions and decision-making processes of boards of
directors are typically a “black box” (Ma and Khanna, 2016). This holds
especially for M&A decisions because they are strictly confidential until
the final decision is made and the intention to buy another company is
officially announced (i.e., after a communication strategy is developed,
including the details of the deal). The board meetings take place in a
“closed room” and are private and confidential, and board minutes are
not made publicly available (see, e.g., Schwartz-Ziv and Weisbach,
2013). In addition, as mentioned by Schwartz-Ziv and Weisbach (2013,
p. 353), “important interactions take place outside the boardroom.”
Thus, decisions in board meetings tend to follow both bilateral and
multilateral pre-discussions of board members, e.g., during bilateral
premeetings or even dinners the evening before a meeting. In the board
meeting, decisions are made by a voting procedure. Each member of the
board of directors has one vote. The decisions of the board must be
adopted by more than half of all board members.
As previously argued, biased self-attribution in M&A deals may
trigger overconfidence in individual directors, who then overestimate
their own ability and that of their executives in managing potential
targets. They potentially even promote acquisition targets in the
boardroom rather than only approving targets proposed by the man­
agement (Malmendier and Tate, 2008; McDonald et al., 2008) and may
want to acquire firms even if they lack the necessary skills (Billett and
Qian, 2008; Doukas and Petmezas, 2008; Heath and Tversky, 1991;
Malmendier and Tate, 2008). Early work in psychology claims that
groups perform better than individuals in a wide set of tasks due to their
ability to self-correct and avoid errors (see, e.g., Kerr and Tindale, 2004,
for a review). However, behavioral biases of individual group members
can negatively affect the decision quality (see, e.g., Meikle et al., 2016;
Tindale, 1993; Westphal and Bednar, 2005; Zhu, 2013). The influence of
biased group members on group decisions is particularly severe if the
correct solution is not easily identifiable ex-ante (Alicke et al., 1995;
Tindale, 1993), which is arguably the case in takeover decisions
(Haunschild, 1994).
While the exact function of how individual overconfidence translates
into group overconfidence is not yet known and is difficult to predict,
Plous, 1995 and Schuldt et al. (2017) argue that there are no differences
in the overconfidence levels of groups and individual group members,
suggesting that the overconfidence of individual directors sums up to
board overconfidence. Indeed, Cheng et al. (2021) recently showed that
there is a contagion effect of overconfidence and that individuals cali­
brate their self-assessments in response to the confidence others display
in their social group. Overconfident group members often enjoy a high
status and thus more influence within the group, as their (over)confi­
dence is perceived as a sign of competence and accuracy in judgement
(Anderson et al., 2012; Kerr and Tindale, 2004; Zarnoth and Sniezek,
1997). In addition, Wittenbaum et al. (1999) and Carpenter and West­
phal (2001) argue that a group is more likely to follow the opinion of
members who are perceived to possess expertise (allegedly) gained in
task-specific experience. In the case of prior task-related experiences in
M&A deals, the group, i.e., the board of directors, may thus be even
more likely to follow overconfident directors.
In sum, the decisions of a board of directors are influenced by the
individual overconfidence of its members. The more overconfident di­
rectors on the board, the stronger the influence of individual over­
confidence (also known as contagion effect) and the stronger the board’s
overconfidence. Eventually, the final decision of the board is presented
to the outside world and (almost always) fully supported by the entire
group of directors, which then reflects the overall board’s (over)
confidence.
T. Twardawski and A. Kind
When companies announce their (board’s) M&A decision, investors
try to reduce information asymmetry by accurately scrutinizing the
decision makers’ capabilities and evaluating the goodness of the deal
(Cohen and Dean, 2005; Pan et al, 2018). By assuming that markets are
efficient, the announcement reaction around a merger will capture the
value relevance of the M&A event and, thereby, provide estimates of the
quality (and accuracy) of board decisions. In particular, announcement
returns measure the investors’ expectation about the performance of the
deal and thus represent an external validation of the merger. As a
consequence of a potentially value-destroying deal, e.g., due to an
overoptimistic assessment by the board, investors revalue the shares and
may sell them. The new value on the stock market is then lower than the
value before the announcement. We thus hypothesize:
H1. There is a negative relationship between board (directors’)
overconfidence and the investor reactions upon the announcement of
M&A deals (i.e., announcement returns).
Besides the choice of the target, the most crucial ingredient of a
takeover decision is the price to be paid. In fact, depending on the
premium paid, an acquisition can be either a financial success or a
failure. According to Haunschild (1994), this price reflects a funda­
mental tradeoff. The acquirer can offer a low price with the risk of either
failing to convince the target’s management and shareholders or losing
the takeover fight to a better or more (over)confident competitor.
Alternatively, it can offer a high price with the risk of overpaying and
being subject to the winner’s curse (Slusky and Caves, 1991; Varaiya and
Ferris, 1987). As overconfident directors overvalue the cash flows that a
certain target can generate under the acquirer’s management (Hauns­
child, 1994; Levi et al., 2014), the coalition of overconfident directors
will be willing to offer higher, and likely excessive, bids. Therefore, in
internal boardroom discussions overconfident directors will argue in
favor of paying higher takeover premiums to overbid potential com­
petitors in a takeover fight. We therefore hypothesize:
H2. There is a positive relationship between board (directors’)
overconfidence and acquisition premiums.
3. Method and data
3.1. Data and sample
We obtain a sample of corporate takeovers from the U.S. Mergers and
Acquisitions Database of Thomson One SDC Platinum (SDC). The data­
base comprises deal characteristics of domestic and cross-border take­
overs that were announced between 1980 and 2013. We retain deals if
the acquirer is a publicly traded U.S. company, the target is a publicly
traded domestic or foreign company, and the deal value exceeds one
million dollars as measured by the total amount paid by the acquirer,
excluding fees and expenses (Fuller et al., 2002; Haunschild, 1994;
Malhotra et al., 2015; Moeller et al., 2004). With respect to H1, we
consider only corporate acquisitions for which we can compute excess
stock returns and directors’ overconfidence, and for which a set of
common controls is available. The computation of excess stock returns
requires merging the SDC sample with the stock database of the Center
of Research in Security Prices (CRSP). Our identification of directors’
overconfidence uses the database MSCI GMI Ratings (data on corporate
governance characteristics and ratings), which includes annual infor­
mation on directors and (starting from 2006) also top executives, i.e.,
CEOs and CFOs, (i.e., vitas of CEOs, CFOs, and other board members) in
the Russell 3000 index and thus covers 98 percent of the market capi­
talization of publicly traded U.S. companies. The final sample consists of
5
Journal of Business Research 165 (2023) 114026
486 public deals in the period 2009–2013.12
For H2, the sample shrinks from 468 to 290 because of additional
data requirements associated with the computation of acquisition pre­
miums and the inclusion of additional common control variables. To
ensure that the results are not driven by idiosyncrasies of the smaller
subsample, we verified the results by re-running all regressions of
acquisition premiums while excluding the added control variables and
using the entire sample of 401 takeovers with available premiums.
3.2. Dependent variables
Investor reactions: Following prior literature on CEO overconfidence
(Billett and Qian, 2008; Doukas and Petmezas, 2008; Fuller et al., 2002),
we estimate the investor reactions in terms of daily excess stock returns
(eit) upon takeover announcements by computing the difference be­
tween observed announcement returns of a given firm i and market
returns:
eit = rit − rmt
where rit is the return of firm i at date t and rmt is the value-weighted
return of the market index at date t as provided by CRSP (Fuller et al.,
2002). This approach refrains from estimating model parameters to
predict expected stock returns, which is particularly suitable for our
study because the beta estimates of a market model may likely be biased
if a bidder acquired multiple targets during the estimation period
(Brown and Warner, 1980). In the baseline setting, we use a five-day
event window centered on the announcement day, i.e., [− 2 + 2],
which is consistent with previous research (Fuller et al., 2002). The
event window describes the period over which daily excess returns are
cumulated. A five-day window is long enough to capture the market
reactions triggered by the first mention of the merger as well as slightly
sluggish or anticipated responses (e.g., due to information leakage). We
used Lexis Nexis to search for the exact announcement dates of the
mergers. If a merger is announced on a weekend or a holiday, we
consider the next available trading day as the event date. We did not find
confounding events in the media search. However, to further mitigate
concerns about confounding events (Moeller et al., 2004), we verified
the robustness of our results by using a three-day event window, i.e.,
[− 1 + 1], which is also an established event period. As an additional
robustness check, we computed excess returns using the market model
to predict expected returns. Specifically, we estimated a regression
equation over an estimation period ending 10 days before the event and
extending back to 255 days prior to the event. We then used the resulting
regression coefficients and actual daily returns to compute excess
returns for each firm over the event period of five days. These robustness
checks supported our findings.
Acquisition premiums: The acquisition premium is a standardized
measure of overpayment that allows us to compare a large number of
acquisitions (Haunschild, 1994) and relate them to board over­
confidence. Acquisition premiums are provided by SDC and calculated
as the ratio of the final offer price to the target’s stock price four weeks
prior to the bid minus one. The target’s stock price four weeks prior to
the acquisition announcement is considered a reliable estimate of the
stock value because it is unlikely affected by acquisition bids and rumors
12
Given that our overconfidence measure requires a three-year acquisition
history for each board director, the sample of acquisitions we can use for this
study begins in 2009, i.e., exactly three years after GMI Ratings started col­
lecting information on CEOs, CFOs, and board directors. Since in 2014, GMI
Ratings was acquired by Morgan Stanley Capital International and the data
collection may have changed, we did not use a longer time horizon than 2009 to
2013. However, the final sample consists of 486 public deals – a size that is
sufficient for a solid statistical evaluation. The size is also in line with prior
related research on managerial overconfidence that also collected approxi­
mately 100 deals per year (Billett and Qian, 2008).
T. Twardawski and A. Kind
(Beckman and Haunschild, 2002; Haunschild, 1994; Hayward and
Hambrick, 1997).
3.3. Independent variable
The independent variable is board overconfidence. We follow the
related literature on biased self-attribution and overconfidence and use
a high acquisitiveness within a short span of time to identify board di­
rectors’ overconfidence (Billett and Qian, 2008; Doukas and Petmezas,
2008). On the individual director level, we distinguish between di­
rectors who are frequently involved in acquisitions and those who are
not. In particular, we classify individual directors as overconfident in
each M&A transaction if they carried out at least one other corporate
acquisition as board member, CEO, or CFO within the previous three
years. If board directors were not involved in another acquisition within
the previous three years, we interpret this as low acquisitiveness and
classify the individual director as not overconfident. We thereby account
for the fact that CEOs and board directors often have additional man­
dates as executives (CFOs or CEOs) and board members in other com­
panies and thus, they may develop overconfidence in different firms and
carry it over from one firm to another (Beckman and Haunschild, 2002;
Haunschild, 1993). Further, we consider all acquisitions of public firms,
private firms, and non-public subsidiaries of public and private firms.
To obtain an independent variable that can be used to test for the
influence of directors’ overconfidence on M&A outcomes, we compute
the fraction of overconfident board directors and define it as board
overconfidence. It is important to note that there are interpersonal dy­
namics on the group level and that personality and behavior in groups is
not necessarily a sum of the parts. While the exact function that relates
overconfident directors with aggregate overconfidence of the board of
directors is beyond the scope of the paper (because, so far, it is unknown
and difficult to exactly predict on theoretical grounds), our approach of
aggregating individual overconfidence of board members is guided by
prior research on how characteristics of group members affect group
performance, which has typically proceeded by summing the relevant
characteristics of individual group members (see Kerr and Tindale,
2004; McGrath, 1984). More specifically, our use of the fraction of
overconfident directors as an aggregate overcondifence measure at the
board level complies with recent related studies on the decision-making
of boards in mergers and acquisitions (see, e.g., Almandoz and Tilcsik,
2015; Chen et al., 2016; Levi et al., 2014).
In the supplemental analysis section, we compute several variations
of this board overconfidence measure that account for different aspects
to be considered in the development of individual overconfidence and
the aggregation to group overconfidence. Finally, we wind up the
analysis by following Hayward and Hambrick (1997) and Chen et al.
(2015) and develop and test an overconfidence index that aggregates
several overconfidence indicators used in the prior CEO overconfidence
literature (Chen et al., 2015; Hayward and Hambrick, 1997; Lee et al.,
2017) that can, however, be customized to the board level and that are
unrelated with prior M&A experience.
Validation of the measure. Our strategy to identify overconfidence via
high acquisitiveness follows related literature (Billett and Qian, 2008;
Doukas and Petmezas, 2008). It complies with the self-attribution theory
for the following reasons. First, while a low number of deals (typically
first deals) should be unbiased, biased self-attribution in recent M&A
deals leads to overconfidence and affects decision-making processes in
subsequent acquisitions. Second, theoretical arguments predict that
overconfident managers engage in a series of mergers. Finally, it ac­
counts for the fact that overconfidence may level off after a sufficiently
long period without mergers has elapsed, e.g., after three years.
In the supplemental analysis section, we validate the overconfidence
identification strategy. We show that while overconfidence leads to
value-destroying deals, there is a significantly positive correlation be­
tween overconfidence and optimism in trading own stocks (insider
trading), supporting the argument that directors were too confident and
6
Journal of Business Research 165 (2023) 114026
not aware of their behavioral bias. In other words, overconfidence leads
directors to destroy their own wealth by investing in the company stock
prior to announcing value-reducing acquisitions. In addition, we test the
validity of our findings by using both alternative plausible ways to
aggregate individual overconfidence at the board level, and alternative
overconfidence measures.
3.4. Control variables
To isolate the effect of board overconfidence on acquirers’ excess
stock returns upon takeover announcements (H1) from the influence of
other variables that scholars in the field of mergers and acquisitions
have found to have explanatory power, we include a set of commonly
used controls. In particular, we include the following deal characteristics
(as provided by SDC). Conglomerate is a dummy variable that equals
one if the two-digit SICs of the acquirer and the target differ and zero
otherwise (Fowler and Schmidt, 1989; Krishnan et al., 1997). Cash deal
is a dummy variable that equals one if over half of the payment is in cash
and zero otherwise. Cash payments signal that the acquirer’s firm value
is too low, which leads to higher excess returns (Haleblian and Finkel­
stein, 1999; Zhu, 2013). Size of the target measures the log of the tar­
gets’ asset values. Competition is a dummy variable that equals one if
competing bidders exist and zero otherwise (Schwert, 1996). Other
dummy variables indicate whether the acquisition is performed via a
tender offer, by a financial firm (acquirer SIC between 6000 and 6999),
and whether the deal is domestic, i.e., the target is a U.S. company.
Further, we control for the following financial attributes of the
acquiring firm (as obtained from CRSP and Compustat): debt to equity
ratio; Tobin’s Q, calculated as total assets minus book equity plus the
market value divided by total assets (Servaes, 1991); operating cash
flow, which is equal to cash flows from operations; and size of the
acquirer, measured by the log of the acquirer‘s asset values.13 We
include the acquirer’s previous-year stock performance measured as the
sum of monthly CRSP stock returns (excluding the month of the
announcement) because well-performing firms may also be better
acquirers (Haleblian and Finkelstein, 1999).
Governance and especially board characteristics of the acquiring
firm are known to be related to the effectiveness of boards as monitors
and advisers. To address this issue, we include the following variables
(obtained from GMI Ratings) in our cross-sectional regressions: board
size, i.e., the number of directors in each board (Coles et al., 2008;
Yermack, 1996); CEO duality, i.e., a dummy equal to one if the CEO also
holds the position of chairman of the board and zero otherwise; and the
fraction of independent directors (Basuil and Datta, 2017; Choi et al.,
2019; Kolasinski and Li, 2013; McDonald et al., 2008; Tao et al., 2019;
Weisbach, 1988). In our setting, the inclusion of the fraction of inde­
pendent directors (i.e., the number of outside directors divided by board
size) is particularly relevant because outside directors may be more
prone to overconfidence since they are less involved with the M&A
execution and therefore less likely to be held accountable. Thus, by
including this board characteristic, we mitigate the specific concern that
board overconfidence may capture the effects caused by directors being
less accountable. In addition, we consider the fraction of female di­
rectors on the board because female directors may be more conservative
(and less likely overconfident) (Chen et al., 2019; Levi et al., 2014;
McCarty, 1986; Renerte et al., 2023). We also account for the board
(directors’) busyness, i.e., the fraction of directors with more than three
corporate directorships, because multiple directorships can be related to
the directors’ reputation, network, experiences, or the strength of a
13
Since Wiseman (2009) shows that ratio correlation, i.e., the use of ratios
with the same denominator as explanatory variables, is an issue in the strategic
management and merger literature, we avoid such regression specifications.
However, for the sake of comparability with previous findings, we still include
Tobin’s Q (market-to-book ratio) and size (log of assets) in the regressions.
T. Twardawski and A. Kind Journal of Business Research 165 (2023) 114026

Table 1
Descriptive statistics and Pearson correlations for H1 (n = 468).
Mean S.D. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

1. Excess returns 0.72 6.75

2. Fraction of overconfident directors 0.53 0.37 − 0.17
3. CEO overconfidence 0.71 0.45 − 0.16 0.56
4. Size of the acquirer 8.57 1.79 − 0.08 0.37 0.29
5. Debt to equity 0.33 0.65 0.11 − 0.08 − 0.05 0.06
6. Conglomerate 0.36 0.48 − 0.02 0.19 0.07 0.17 − 0.03
7. Financial firm 0.18 0.39 − 0.05 − 0.26 − 0.14 0.04 0.09 − 0.06
8. Domestic deal 0.76 0.42 0.01 − 0.12 − 0.06 − 0.00 0.09 − 0.08 0.18
9. Tender offer 0.16 0.37 − 0.04 0.13 0.12 0.05 − 0.12 − 0.04 − 0.17 0.06
10. Cash deal 0.55 0.50 0.12 0.15 0.02 0.11 − 0.12 0.10 − 0.30 − 0.08 0.25
11. Tobin’s Q 1.84 1.22 0.10 0.03 − 0.01 − 0.15 − 0.19 0.05 − 0.25 − 0.03 0.08 0.13
12. Operating cash flow 0.02 0.07 − 0.04 0.19 0.11 0.54 0.03 0.15 − 0.01 − 0.09 0.04 0.12
13. Board size 9.86 2.54 − 0.05 0.15 0.17 0.61 − 0.09 0.11 0.22 0.00 − 0.02 − 0.03
14. CEO duality 0.49 0.50 − 0.04 0.11 0.16 0.22 0.11 0.09 − 0.05 − 0.06 − 0.03 0.09
15. Percentage of ind. dir. 0.70 0.19 − 0.06 0.23 0.13 0.19 − 0.02 0.02 − 0.13 − 0.02 0.03 0.00
16. Institutional majority 0.73 0.45 − 0.14 0.17 0.19 0.27 − 0.23 0.06 − 0.07 0.02 0.07 0.03
17. Merger activity 798.38 127.84 0.18 − 0.00 − 0.02 0.01 − 0.05 0.00 0.06 0.04 0.05 − 0.02
18. Acq. prev.-year stock pe. 0.17 0.49 − 0.03 − 0.02 − 0.05 − 0.08 0.13 − 0.06 − 0.03 − 0.04 − 0.11 0.04
19. Size of the target 5.97 2.03 0.05 − 0.03 0.03 0.43 0.15 − 0.05 0.20 0.15 − 0.06 − 0.20
20. Competition 0.08 0.27 − 0.05 0.01 0.03 − 0.07 0.02 − 0.14 0.00 − 0.02 0.04 0.00
21. Acquisition experience 5.74 4.30 − 0.08 0.63 0.41 0.49 − 0.08 0.23 − 0.25 − 0.06 0.12 0.25
22. Board busyness 0.16 0.41 0.00 3.33 − 0.07 0.11 0.01 0.12 − 0.01 0.04 − 0.12 − 0.02
23. Fraction of female dir. 0.12 0.09 0.00 0.50 − 0.08 0.12 0.05 0.40 0.05 0.11 0.01 0.08

11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.
12. Operating cash flow − 0.06
13. Board size − 0.16 0.34
14. CEO duality 0.06 0.15 0.12
15. Percentage of ind. dir. 0.00 0.11 0.18 0.10
16. Institutional majority − 0.05 0.14 0.23 0.06 0.16
17. Merger activity 0.06 0.04 0.01 − 0.09 − 0.14 − 0.03
18. Acq. prev.-year stock pe. 0.07 − 0.05 − 0.08 0.07 0.00 − 0.08 − 0.33
19. Size of the target − 0.17 0.12 0.32 0.01 − 0.02 0.04 0.06 − 0.04
20. Competition 0.01 − 0.05 − 0.07 − 0.07 − 0.04 − 0.03 0.00 0.13 0.04
21. Acquisition experience 0.05 0.24 0.22 0.18 0.14 0.23 0.09 − 0.04 0.00 − 0.06
22. Board busyness 0.03 0.02 0.04 0.01 − 0.02 − 0.00 0.01 0.01 0.03 − 0.01 0.17
23. Fraction of female dir. 0.05 0.25 0.27 0.07 0.17 0.12 0.02 − 0.01 0.20 − 0.05 0.21 0.05
Note: S.D.: Standard Deviation

firm’s governance structure (Fich and Shivdasani, 2012) and may thus
influence investor reactions and acquisition premiums. We also follow
McDonald et al. (2008) and run the regressions by including institu­
tional majority, a dummy variable which assumes a value of one if the
majority of outstanding shares are held by institutional investors and
zero otherwise. It is suggested that institutional ownership reduces
agency problems and may enhance takeover decisions.
Since we follow the notion that overconfidence is based on recent
prior M&A experience, i.e., when individual directors are unlikely to
learn (as mentioned in the theory section), we also need to account for
learning effects that may arise over time. We therefore include the di­
rectors’ long-term acquisition experience, which is shown to be posi­
tively related with the quality of corporate takeovers (see, e.g.,
McDonald et al., 2008). In particular, the variable acquisition experi­
ence measures the average number of acquisitions carried out by board
directors of a given firm prior to the focal acquisition, starting from
2006. Long-term acquisition experience takes into account all acquisi­
tion experience that directors gained as board member, CEO, or CFO. We
thereby isolate the impact of overconfidence (as measured by recent
experience) on takeover decisions by explicitly filtering out the influ­
ence of long-term experience. Further, we add a dummy variable, CEO
overconfidence, equal to one if the CEO is classified as being over­
confident (which we measure similarly to director overconfidence) and
zero otherwise.
As acquisitions often come in waves that may drive both our measure
of director overconfidence and higher premiums as well as lower M&A
performance (Carow et al., 2004; Kolev et al., 2012), we follow Doukas
and Petmezas (2008) and account for the merger activity in the previous
year, i.e., the number of private, public, and subsidiary deals which we
used to develop our measure of director overconfidence. In line with Zhu
(2013), we control for the average prior premium (mean of individual-
level average prior premiums) experienced by a focal board of directors
across all boards, during the prior 48-month period. To avoid a signifi­
cant drop in the number of observations, average prior premium is set to
zero if the board has no prior premium experience. In a similar way, we
control for the average prior acquisition size experienced by board di­
rectors during the prior 48-month period.
With respect to H2, we include in our regression models additional
controls that have been shown to be relevant when studying acquisition
premiums. For instance, we include two further target-related charac­
teristics that are often used for explaining acquisition premiums (Levi
et al., 2014): the target’s return on assets (ROA) as a measure of firm
profitability and the target’s leverage ratio. We additionally control for
the target’s Tobin’s Q because high premiums are often paid for
undervalued (rather than overvalued) targets. By including in all re­
gressions the target’s Tobin’s Q in combination with industry dummies,
we account for the target’s valuation compared to industry peers (Laa­
manen, 2007).
3.5. Analysis
We test H1 and H2 in a multivariate regression setting. Because we
can only observe firms that conduct acquisitions, we adopt a Heckman
(1979) two-step estimation procedure that mitigates potential endoge­
neity induced by a non-random sample. In the first step, we estimate the
selection model, i.e., a firm’s probability of being an acquirer and
therefore entering the sample. The selection model used a larger sample
that contained acquiring and non-acquiring Russel 3,000 firms with

7
T. Twardawski and A. Kind Journal of Business Research 165 (2023) 114026

Table 2
Descriptive statistics and Pearson correlations for H2 (n = 290).
Mean S.D. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

1. Acquisition premium 0.53 0.62

2. Fraction of 0.53 0.37 0.14
overconfident directors
3. CEO overconfidence 0.71 0.45 0.01 0.56
4. Size of the acquirer 8.57 1.79 − 0.03 0.37 0.29
5. Debt to equity 0.33 0.65 0.08 − 0.08 − 0.05 0.06
6. Conglomerate 0.36 0.48 − 0.02 0.19 0.07 0.17 − 0.03
7. Financial firm 0.18 0.39 − 0.06 − 0.26 − 0.14 0.04 0.09 − 0.06
8. Domestic deal 0.76 0.42 0.05 − 0.12 − 0.06 − 0.00 0.09 − 0.08 0.18
9. Tender offer 0.16 0.37 0.01 0.13 0.12 0.05 − 0.12 − 0.04 − 0.17 0.06
10. Cash deal 0.55 0.50 0.04 0.15 0.02 0.11 − 0.12 0.10 − 0.30 − 0.08 0.25
11. Tobin’s Q 1.84 1.22 − 0.02 0.03 − 0.01 − 0.15 − 0.19 0.05 − 0.25 − 0.03 0.08 0.13
12. Operating cash flow 0.02 0.07 0.04 0.19 0.11 0.54 0.03 0.15 − 0.01 − 0.09 0.04 0.12 − 0.06
13. Board size 9.86 2.54 − 0.07 0.15 0.17 0.61 − 0.09 0.11 0.22 0.00 − 0.02 − 0.03 − 0.16 0.34
14. CEO duality 0.49 0.50 0.06 0.11 0.16 0.22 0.11 0.09 − 0.05 − 0.06 − 0.03 0.09 0.06 0.15
15. Percentage of ind. 0.70 0.19 0.05 0.23 0.13 0.19 − 0.02 0.02 − 0.13 − 0.02 0.03 0.00 0.00 0.11
directors
16. Institutional majority 0.73 0.45 0.08 0.17 0.19 0.27 − 0.23 0.06 − 0.07 0.02 0.07 0.03 − 0.05 0.14
17. Merger activity 798.38 127.84 − 0.08 − 0.00 − 0.02 0.01 − 0.05 0.00 0.06 0.04 0.05 − 0.02 0.06 0.04
18. Acquirer’s prev.-year 0.17 0.49 0.02 − 0.02 − 0.05 − 0.08 0.13 − 0.06 − 0.03 − 0.04 − 0.11 0.04 0.07 − 0.05
stock perf.
19. Size of the target 5.97 2.03 − 0.21 − 0.03 0.03 0.43 0.15 − 0.05 0.20 0.15 − 0.06 − 0.20 − 0.17 0.12
20. Competition 0.08 0.27 0.12 0.01 0.03 − 0.07 0.02 − 0.14 0.00 − 0.02 0.04 0.00 0.01 − 0.05
21. Acquisition 5.74 4.30 0.01 0.63 0.41 0.49 − 0.08 0.23 − 0.25 − 0.06 0.12 0.25 0.05 0.24
experience
22. Directors’ av. prior 0.22 0.38 0.04 0.24 0.23 0.21 − 0.05 0.03 − 0.00 − 0.08 0.09 0.05 − 0.04 0.12
acq. premium
23. Directors’ av. prior 0.11 0.32 0.02 0.19 0.17 0.21 − 0.05 − 0.09 0.02 0.04 0.11 − 0.05 − 0.06 0.15
acq. size
24. Fraction of female 0.12 0.09 − 0.03 0.12 0.05 0.40 0.05 0.11 0.01 0.04 0.02 0.08 0.05 0.25
directors
25. Target ROA − 0.03 0.36 − 0.30 0.02 0.04 0.13 0.01 0.05 0.06 − 0.13 − 0.01 − 0.05 − 0.07 0.03
26. Target leverage 0.17 0.23 0.09 0.00 − 0.01 0.14 0.17 0.03 − 0.11 0.03 − 0.08 0.02 − 0.06 0.09
27. Target Tobin’s Q 1.31 7.35 − 0.02 − 0.09 − 0.10 − 0.14 − 0.03 0.07 − 0.02 − 0.10 − 0.04 0.03 0.18 − 0.03
28. Board busyness 0.16 0.41 − 0.03 0.11 0.01 0.12 − 0.01 0.04 − 0.12 0.04 − 0.05 − 0.02 0.03 0.02

13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27.
14. CEO duality 0.12
15. Percentage of ind. 0.18 0.10
directors
16. Institutional majority 0.23 0.06 0.16
17. Merger activity 0.01 − 0.09 − 0.14 − 0.03
18. Acquirer’s prev.-year − 0.08 0.07 0.00 − 0.08 − 0.33
stock perf.
19. Size of the target 0.32 0.01 − 0.02 0.04 0.06 − 0.04
20. Competition − 0.07 − 0.07 − 0.04 − 0.03 0.00 0.13 0.04
21. Acquisition 0.22 0.18 0.14 0.23 0.09 − 0.04 0.00 − 0.06
experience
22. Directors’ av. prior 0.25 0.09 0.04 0.20 0.03 − 0.04 0.06 − 0.07 0.21
acq. premium
23. Directors’ av. prior 0.22 0.02 0.11 0.16 0.02 − 0.01 0.08 − 0.02 0.18 0.60
acq. size
24. Fraction of female 0.27 0.07 0.17 0.12 0.02 − 0.01 0.20 − 0.05 0.21 0.12 0.05
directors
25. Target ROA 0.11 0.08 0.08 0.03 − 0.08 0.00 0.18 0.03 0.04 0.04 0.01 0.06
26. Target leverage 0.05 0.07 0.01 − 0.02 0.05 0.07 0.36 0.07 − 0.01 0.07 0.03 0.15 − 0.03
27. Target Tobin’s Q − 0.08 − 0.05 − 0.06 − 0.07 0.03 0.04 − 0.07 − 0.01 − 0.08 − 0.03 − 0.03 0.04 0.03 0.05
28. Board busyness 0.04 0.01 − 0.02 − 0.00 0.01 0.01 0.03 − 0.01 0.17 − 0.02 − 0.00 0.05 − 0.03 − 0.05 − 0.03
Note: S.D.: Standard Deviation

8
T. Twardawski and A. Kind Journal of Business Research 165 (2023) 114026

Table 3 acquisition experience, as well as industry and year dummies.14 We

Results from Heckman sample selection models (H1). included the economy-wide merger activity and the industry-specific
Model 1 Model 2 merger activity in the first-stage regression of the Heckman estimation
to ensure that there is no selection bias with respect to the intensity of
Fraction of overconfident directors − 2.525*
(1.265) the M&A market, i.e., to exclude that shortage of available targets drives
Inverse Mills ratio − 0.232 − 0.014 our results.
(0.403) (0.416) In the second stage of the Heckman procedure, we estimate a model
CEO overconfidence − 2.559** − 1.977* for the acquirers’ excess returns or acquisition premiums, including the
(0.812) (0.860)
Size of the acquirer − 0.007 0.096
inverse of the Mills ratio obtained from the selection model. The coef­
(0.338) (0.341) ficient of the inverse of the Mills ratio thereby captures the effect of
Debt to equity 0.877 0.822 unmeasured differences between being an acquirer or a non-acquirer
(0.595) (0.593) and thus mitigates endogeneity concerns. To account for autocorrela­
Conglomerate − 0.001 0.077
tion, we cluster standard errors at the firm level. Since White tests were
(0.735) (0.734)
Financial firm 3.701 3.691 not rejected, heteroscedasticity does not seem to bias our results.
(3.797) (3.782) To assess the robustness of the findings, we also ran ordinary least
Domestic deal − 0.402 − 0.572 squares models with clustered and robust standard errors. The results
(0.797) (0.798) were similar to the reported results based on Heckman’s estimation
Tender offer − 1.025 − 1.034
(0.902) (0.899)
procedure. Further, we repeated the analysis for H1 by including the
Cash deal 2.317** 2.318** acquisition premium as an additional control variable to address the
(0.730) (0.727) concern that precisely the payment of higher premiums by over­
Tobin’s Q 0.692* 0.681* confident directors led to lower announcement returns. Similar to Laa­
(0.298) (0.297)
manen (2007), we found that acquisition premiums and excess
Operating cash flow − 1.245 − 1.408
(5.469) (5.449) announcement returns are weakly correlated and thus the regression
Board size 0.173 0.151 results did not change in a material way. As in these additional re­
(0.174) (0.174) gressions the sample size decreased significantly, we only report the
CEO duality 0.164 0.079 results without premiums. Finally, we ran additional regression analyses
(0.683) (0.682)
in which we randomly dropped control variables. The results remained
Percentage of independent directors 2.776 3.044
(2.022) (2.019) unchanged. We report the most conservative results since in some un­
Institutional majority 0.052 − 0.037 reported regressions the significance level was even higher.
(0.803) (0.801)
Merger activity 0.053*** 0.049**
4. Results
(0.015) (0.015)
Acquirer’s previous-year stock performance − 1.611* − 1.547*
(0.783) (0.781) Table 1 and Table 2 present summary statistics and correlation co­
Size of the target 0.270 0.245 efficients between each pair of variables in the two final samples for
(0.193) (0.193) excess returns and takeover premiums, respectively.
Competition − 1.474 − 1.537
The average fraction of overconfident directors in a board amounts
(1.175) (1.171)
Acquisition experience − 0.062 0.024 to 53 percent. The fraction of overconfident CEOs (71 percent) is higher
(0.103) (0.111) than in Billett and Qian (2008) (about 50 percent) because we addi­
Fraction of female directors − 1.700* − 1.606* tionally account for experience gained in other boards. The correlation
(0.782) (0.781)
between CEO overconfidence and board overconfidence is positive but
Board busyness 1.024* 1.045*
(0.406) (0.405)
low enough to suggest that the two variables measure related but
Constant − 47.434*** − 44.225** distinct characteristics. All correlations between pairs of controls and
(14.271) (14.308) independent variables are low, which excludes problems of multi­
Year and industry dummies YES YES collinearity. In fact, the variance inflation factors (VIFs) were always
Observations 468 468
lower than four and the mean VIF was not significantly greater than one
Adjusted R-squared 0.166 0.172
(Chatterjee et al., 2000) in any of the regressions.
Note: two-tailed tests for all variables; standard errors in parentheses; *** p < Table 3 reports the results of multivariate regressions with robust
0.001, ** p < 0.01, * p < 0.05, † p < 0.1. standard errors in parentheses. Model 1 displays regression results of
excess announcement returns on controls without the inclusion of board
overconfidence. The coefficient of CEO overconfidence is negative and
available data (13,627 firm-year observations) and several variables to significant (β = − 2.56, p < 0.01), which is in line with the findings of
predict whether a firm carries out an acquisition and is thus part of our prior literature. This result is interesting because it is obtained by an
sample. These variables included size, leverage, free cash flow to assets, enhanced overconfidence measure that – as suggested by Beckman and
Tobin’s Q, cash to assets ratio, annual stock performance, annual stock Haunschild (2002), Haunschild (1993), and Schlenker and Miller (1977)
performance of the industry, annual stock performance of the market, – also considers the development of CEO overconfidence based on deals
economy-wide merger activity in the previous year (i.e., the number of approved when serving as board director in other firms.
acquisitions in the overall economy), industry-specific merger activity in
the previous year (i.e., the number of acquisitions in the specific in­
dustry a firm operates in), number of prior deals experienced by the 14
To measure time-invariant unobservables, we followed the literature closest
CEO, average prior acquisition premiums of the board, average prior
to our study (Billett and Qian, 2008; Chen et al. 2016; Zhu 2013) and controlled
acquisition size of the board, a dummy equal to one if the board has prior for industry-fixed effects rather than firm-fixed effects. This is because M&A
transactions tend to be rare events for individual companies, but there are in­
dustries in which they may occur more frequently. In the period of this study
(2009–2013), the majority of companies in the sample (~75 percent) conduct
only one M&A transaction, but 90 percent of industries experience more than
one deal.

9
T. Twardawski and A. Kind Journal of Business Research 165 (2023) 114026

Table 4 have been attributed to board overconfidence. In addition, the results

Results from Heckman sample selection models (H2). indicate that the effect of board overconfidence on the quality of
Model 3 Model 4 corporate acquisitions is separate from (and adds to) the effect of CEO
overconfidence. The results thus support H1.
Fraction of overconfident directors 0.412**
(0.148) Table 4 presents the regression results for H2 regarding the influence
Inverse Mills ratio − 0.024 − 0.056 of board overconfidence on takeover premiums. Unlike in the regression
(0.047) (0.048) based on excess returns, the overconfidence of CEOs is not found to be
CEO overconfidence − 0.068 − 0.183† statistically significant (Model 3). Thus, while CEO overconfidence
(0.101) (0.108)
Size of the acquirer 0.005 − 0.011
seems to have an impact on the quality of corporate takeover decisions
(0.043) (0.042) (as perceived by the market), this does not translate into higher pre­
Debt to equity 0.321** 0.304** miums. Model 4 evidences that acquisition premiums are positively and
(0.106) (0.105) significantly related to board overconfidence. In economic terms, a
Conglomerate 0.009 − 0.006
change in the fraction of overconfident directors by 10 percentage
(0.088) (0.086)
Financial firm 0.044 0.095 points, i.e., approximately one additional overconfident director, is
(0.359) (0.354) associated, all else being equal, with higher takeover premiums of 4.12
Domestic deal 0.164 0.144 percentage points (p < 0.01). The results therefore support H2.
(0.163) (0.161) In Fig. 1, we graphically illustrate the substantial effect of board
Tender offer − 0.035 − 0.040
(0.106) (0.104)
overconfidence on acquirers’ excess announcement returns and pre­
Cash deal − 0.009 − 0.017 miums paid, using t-tests. The announcement of corporate acquisitions
(0.097) (0.095) conducted by boards with a majority of overconfident directors is fol­
Tobin’s Q − 0.002 − 0.009 lowed by significantly lower returns than announcement of corporate
(0.046) (0.045)
acquisitions conducted by boards with less than 50 percent over­
Operating cash flow 3.175* 3.221*
(1.362) (1.342) confident directors (− 2.23 percentage points, p < 0.001). We observe
Board size − 0.001 0.002 even stronger differences when comparing highly overconfident boards,
(0.019) (0.019) i.e., boards in the top quartile of the distribution of fractions of over­
CEO duality − 0.012 − 0.000 confident directors, to boards in the bottom quartile. All else being
(0.080) (0.079)
equal, an upward shift in board overconfidence from the 25th to the
Percentage of independent directors − 0.033 − 0.081
(0.238) (0.235) 75th percentile decreases five-day excess stock returns by 3.58 per­
Institutional majority 0.088 0.088 centage points on average (p < 0.001). We find a similar pattern for
(0.094) (0.093) acquisition premiums. Boards with a majority of overconfident directors
Merger activity 0.001 0.001
pay significantly more for targets than boards with less than 50 percent
(0.002) (0.002)
Acquirer’s previous-year stock performance − 0.129 − 0.113 overconfident directors (+15.3 percentage points, p < 0.05). And all else
(0.097) (0.096) being equal, an upward shift in board overconfidence from the 25th to
Size of the target − 0.067* − 0.060* the 75th percentile increases premiums paid by 16.3 percentage points
(0.027) (0.027) on average (p < 0.05).
Competition 0.384** 0.349*
(0.136) (0.135)
Acquisition experience − 0.007 − 0.018 5. Supplemental analysis
(0.012) (0.013)
Directors’ average prior acquisition premium 0.233 0.181 5.1. Reliance of identification of overconfidence
(0.147) (0.146)
Directors’ average prior acquisition size − 0.257† − 0.222
(0.142) (0.141) Our measure of directors’ overconfidence (and thus board over­
Board busyness − 0.155 − 0.165 confidence) is developed in accordance with theoretical assumptions.
(0.111) (0.109) However, it still represents a proxy of an unobservable personal char­
Fraction of female directors − 1.030* − 1.008* acteristic. Thus, to investigate the reliability of our overconfidence
(0.463) (0.456)
Target ROA − 0.393*** − 0.388***
measure, we follow the CEO overconfidence literature (Billett and Qian,
(0.100) (0.098) 2008; Doukas and Petmezas, 2008; Malmendier and Tate, 2008) and
Target leverage 0.300 0.306 study the insider trading of directors prior to M&A deals. If our measure
(0.193) (0.190) is reliable and overconfident directors strongly believe that they will
Target Tobin’s Q 0.001 0.001
create value via acquisitions, we should expect directors in boards with a
(0.004) (0.004)
Constant − 0.240 − 0.246 high fraction of overconfident members to be engaged in more opti­
(1.644) (1.620) mistic trades than directors in boards with a low fraction of over­
Year and industry dummies YES YES confident members. The reason is as follows: Since we showed that
Observations 290 290 board overconfidence leads to poor acquisitions, a positive correlation
Adjusted R-squared 0.192 0.216
between insider trading and our overconfidence measure supports the
Note: two-tailed tests for all variables; standard errors in parentheses; *** p < argument that directors were too confident and not aware of their
0.001, ** p < 0.01, * p < 0.05, † p < 0.1. behavioral bias, leading them to destroy their own wealth by investing
in the company stock prior to announcing a value-reducing acquisition.
Model 2 adds board overconfidence to the regression and shows that It is important to note that, on the contrary, using insider trading as an
it has a negative, significant, and economically meaningful impact on overconfidence measure would not be appropriate as it does not allow to
takeover announcement returns (β = − 2.53, p < 0.05). A change in the distinguish between overconfidence and genuine confidence in a deal
fraction of overconfident directors of 10 percentage points, e.g., (Billett and Qian, 2008).
approximately one additional overconfident director, is, all else being To test the relationship between our board overconfidence measure
equal, associated with lower excess returns of 0.25 percentage points. and directors’ insider trading, we use data on insider trading from
The coefficient of CEO overconfidence in Model 1 is larger in absolute Thomson Financial in the period 2009–2013. The dataset includes all
magnitude than the coefficient in Model 2, which suggests that CEO SEC filings of transactions executed by insiders, such as executives or
overconfidence in prior studies captured some of the effect that should board directors, who are subject to disclosure according to the Securities

10
T. Twardawski and A. Kind
Fig. 1. A) Difference in Announcement Returns. b) Difference in Acquisition Premiums. Note: Illustration of differences in acquirers’ excess announcement
returns and premiums paid by overconfidence of directors, using t-tests.
and Exchange Act of 1934, Section 16(a). We follow Seyhun (1990) and
create a measure of net purchases. In a first step, we compute the
number of stock purchases via open-market or private transactions. In
line with Billett and Qian (2008), we add the number of shares obtained
by managers through option exercises. In a second step, we deduct the
number of sales (both shares owned and shares previously obtained via
option exercises) to obtain the net number of purchases. Finally, we
calculate the net purchase ratio by dividing net purchases by the number
of all transactions, i.e., the number of all sales plus the number of all
purchases. To get a net purchase ratio that is representative of the
trading of a board, we calculate an average net purchase ratio of all
board directors by summing up the net purchase ratios of board mem­
bers and dividing this value by the number of board members who have
traded.
Following Billett and Qian (2008) and Doukas and Petmezas (2008),
we measure insider trading over a period of 180 days (six months) prior
to the announcement of a merger. We only include transactions that are
verified through a cleansing process by Thomson Reuters and identified
by the “Cleanse Indicator” = “R” (high confidence) and “Cleanse Indi­
cator” = “H” (very high confidence). The Thomson Financial database
provides information on directors’ insider trading of companies
involved in 440 corporate takeovers out of the 468 public deals in our
sample.
Unreported results showed that boards with a majority of over­
confident directors displayed positive net purchase ratios that were
11
Journal of Business Research 165 (2023) 114026
significantly higher than those of boards with a minority of over­
confident directors (p < 0.05). The net purchase ratio of boards in the
highest quartile of overconfident directors was even twice as large as the
ratio of boards in the lowest quartile (p < 0.05). Most importantly, we
found a positive and significant Pearson correlation coefficient between
insider trading and the fraction of overconfident directors (ρ = 0.10, p <
0.05). This result indicates that the measure of board overconfidence
proposed in this paper is reflected in directors’ optimistic insider
trading. In contrast, we found that the control variable long-term
experience was not significantly correlated with optimistic insider
trading (ρ = 0.03, p > 0.1), showing that the measure of board over­
confidence is distinct and different from long-term experience.
While prior studies suggest the use of a window of three years to
identify high acquisitiveness and thus overconfident directors (Doukas
and Petmezas, 2008; Fuller et al., 2002), we repeated the key regressions
of our paper by considering both a shorter two-year rolling window
(over the period 2008–2013, with 602 public deals that fulfill our data
requirements) and a longer four-year window (over the period
2010–2013, with 369 public deals). For the former window, the results
were very similar to the baseline case in terms of both significance and
magnitude. For the latter window, the coefficients decreased in magni­
tude (though still exhibiting the predicted signs) and ceased to be sta­
tistically significant. While this result was partially driven by the smaller
number of observations, it also suggests that a longer window starts
capturing the beneficial influence of longer-term M&A experience (Kroll
T. Twardawski and A. Kind Journal of Business Research 165 (2023) 114026

Table 5
Investor reactions and alternative board overconfidence measures.
Model 5 Model 6 Model 7 Model 8 Model 9 Model 10
30% of Majority of board is 70% of Tenure-weighted Overconfidence via Overconfidence
board is overconfident board is overconfidence positive feedback Index
overconfident overconfident

Board overconfidence − 1.429 − 1.439† − 1.674* − 3.139** − 2.641* − 1.573*

(0.881) (0.841) (0.810) (1.142) (1.195) (0.770)
Inverse Mills ratio − 0.135 − 0.074 − 0.031 0.106 − 0.424 − 0.131
(0.406) (0.412) (0.413) (0.418) (0.401) (0.409)
CEO overconfidence − 2.140* − 2.124* − 2.140* − 1.690+ − 2.072** − 2.203**
(0.851) (0.849) (0.834) (0.865) (0.791) (0.813)
Size of the acquirer 0.081 0.013 0.077 0.127 − 0.054 0.236
(0.342) (0.337) (0.339) (0.339) (0.340) (0.374)
Debt to equity 0.841 0.802 0.853 0.789 0.933 0.510
(0.594) (0.595) (0.593) (0.591) (0.598) (0.596)
Conglomerate 0.054 0.061 0.061 0.126 0.103 − 0.274
(0.735) (0.734) (0.733) (0.731) (0.738) (0.730)
Financial firm 3.674 3.729 3.584 3.656 3.716 4.190
(3.789) (3.787) (3.781) (3.765) (3.809) (3.809)
Domestic deal − 0.564 − 0.448 − 0.479 − 0.510 − 0.435 − 0.441
(0.801) (0.795) (0.794) (0.791) (0.805) (0.804)
Tender offer − 1.026 − 1.059 − 1.027 − 0.948 − 1.122 − 1.257
(0.900) (0.900) (0.898) (0.895) (0.905) (0.900)
Cash deal 2.288** 2.362** 2.333** 2.332** 2.495*** 2.588***
(0.729) (0.729) (0.727) (0.724) (0.728) (0.721)
Tobin’s Q 0.695* 0.688* 0.705* 0.700* 0.628* 0.742*
(0.297) (0.297) (0.297) (0.296) (0.300) (0.298)
Operating cash flow − 1.514 − 0.856 − 1.856 − 1.792 0.177 0.008
(5.461) (5.461) (5.455) (5.428) (5.460) (5.462)
Board size 0.173 0.160 0.143 0.229 0.132 0.116
(0.174) (0.174) (0.174) (0.174) (0.175) (0.174)
CEO duality 0.106 0.102 0.079 0.189 − 0.289 0.120
(0.683) (0.682) (0.682) (0.678) (0.694) (0.686)
Percentage of ind. 2.990 2.798 2.748 3.102 3.287 3.061†
directors
(2.022) (2.017) (2.014) (2.009) (2.029) (1.796)
Institutional majority 0.039 0.007 − 0.001 − 0.061 − 0.395 − 0.105
(0.801) (0.801) (0.800) (0.797) (0.802) (0.803)
Merger activity 0.049** 0.049** 0.050** 0.049** 0.044** 0.010***
(0.015) (0.015) (0.015) (0.015) (0.015) (0.003)
Acquirer’s prev.-year − 1.573* − 1.596* − 1.536* − 1.512† − 1.286 − 1.167
stock perf.
(0.782) (0.781) (0.781) (0.777) (0.782) (0.719)
Size of the target 0.252 0.253 0.229 0.230 0.257 0.229
(0.193) (0.193) (0.193) (0.192) (0.194) (0.195)
Competition − 1.621 − 1.496 − 1.567 − 1.538 − 1.771 − 2.000†
(1.176) (1.172) (1.171) (1.165) (1.181) (1.165)
Acquisition experience − 0.024 0.012 0.018 0.053 − 0.125 0.018
(0.105) (0.111) (0.109) (0.110) (0.111) (0.101)
Fraction of female − 1.596* − 1.621* − 1.670* − 1.674* − 1.414† − 1.868*
directors
(0.783) (0.782) (0.779) (0.776) (0.787) (0.779)
Board busyness 1.064** 1.033* 1.000* 1.029* 1.045* 0.893*
(0.406) (0.405) (0.405) (0.403) (0.408) (0.405)
Constant − 44.871** − 44.126** − 45.173** − 45.694** − 40.921** − 12.032**
(14.329) (14.367) (14.254) (14.167) (14.325) (4.347)
Year- and industry YES YES YES YES YES YES
dummies
Observations 468 468 468 468 468 468
Adjusted R-squared 0.170 0.170 0.173 0.180 0.161 0.158

Note: two-tailed tests for all variables; standard errors in parentheses; *** p < 0.001, ** p < 0.01, * p < 0.05, † p < 0.1.

et al., 2008; McDonald et al., 2008) and mitigates the detrimental effect
of directors’ overconfidence. Indeed, we also found that the measure
based on the longer-term window ceased to be significantly correlated
with positive insider trading. This finding suggests that using a shorter
window is appropriate because it disentangles overconfidence from
beneficial long-term M&A experience and supports our identification
strategy via high acquisitiveness.
In sum, our results suggest that high acquisitiveness may identify
overconfidence in the board of directors. We interpret the results simi­
larly to Billett and Qian (2008): We find that deals of boards that are
more frequently involved in acquisitions over a short span of time are
followed by lower announcement returns and potentially destroy
shareholder wealth. The higher the acquisitiveness of individual di­
rectors, the lower the announcement returns. This suggests that over­
confidence is not static but develops over time through biased self-
attribution in M&A deals. More importantly, under a learning hypoth­
esis, the announcement effects of deals made by boards with high
acquisitiveness should improve. Similarly, if boards have an ability in
making value-creating acquisitions and thus tend to acquire more, both
deals with low acquisitiveness and high acquisitiveness should exhibit
the same wealth effects, which they do not. Moreover, we find that di­
rectors buy more stocks the higher their acquisitiveness. Buying stocks is
a sign of their confidence in the ability to create value through the
acquisition. However, at the same time, the announcement returns

12
T. Twardawski and A. Kind Journal of Business Research 165 (2023) 114026

Table 6
Acquisition premiums and alternative board overconfidence measures.
Model 11 Model 12 Model 13 Model 14 Model 15 Model 16
30% of Majority of board is 70% of Tenure-weighted Overconfidence via Overconfidence
board is overconfident board is overconfidence positive feedback Index
overconfident overconfident

Board overconfidence 0.164 0.241* 0.272** 0.276* 0.302* 0.250**

(0.109) (0.099) (0.092) (0.132) (0.131) (0.090)
Inverse Mills ratio − 0.037 − 0.046 − 0.048 − 0.048 − 0.053 − 0.043
(0.047) (0.047) (0.047) (0.048) (0.045) (0.047)
CEO overconfidence − 0.127 − 0.151 − 0.152 − 0.158 0.085 − 0.087
(0.108) (0.106) (0.103) (0.109) (0.089) (0.100)
Size of the acquirer − 0.004 0.002 − 0.013 − 0.011 − 0.016 − 0.045
(0.043) (0.042) (0.042) (0.043) (0.042) (0.046)
Debt to equity 0.318** 0.309** 0.297** 0.318** 0.317** 0.360***
(0.106) (0.105) (0.105) (0.105) (0.105) (0.106)
Conglomerate − 0.002 − 0.002 0.008 − 0.008 0.005 − 0.018
(0.088) (0.087) (0.086) (0.087) (0.087) (0.087)
Financial firm 0.041 0.078 0.114 0.074 0.092 0.057
(0.358) (0.355) (0.354) (0.356) (0.356) (0.354)
Domestic deal 0.151 0.149 0.132 0.151 0.177 0.169
(0.163) (0.161) (0.161) (0.162) (0.164) (0.161)
Tender offer − 0.040 − 0.037 − 0.047 − 0.049 − 0.039 − 0.042
(0.105) (0.104) (0.104) (0.105) (0.105) (0.104)
Cash deal − 0.005 − 0.021 − 0.016 − 0.012 0.003 − 0.021
(0.096) (0.096) (0.095) (0.096) (0.095) (0.095)
Tobin’s Q − 0.008 − 0.006 − 0.015 − 0.008 0.000 − 0.014
(0.046) (0.045) (0.045) (0.046) (0.045) (0.045)
Operating cash flow 3.193* 3.222* 3.354* 3.440* 3.467* 3.273*
(1.358) (1.347) (1.340) (1.358) (1.342) (1.342)
Board size − 0.000 0.000 0.004 − 0.006 − 0.000 − 0.000
(0.019) (0.019) (0.019) (0.019) (0.019) (0.019)
CEO duality − 0.012 − 0.012 − 0.001 − 0.010 − 0.011 0.002
(0.080) (0.079) (0.079) (0.079) (0.080) (0.079)
Percentage of − 0.054 − 0.061 − 0.027 − 0.072 − 0.052 − 0.095
independent directors
(0.237) (0.235) (0.234) (0.236) (0.236) (0.235)
Institutional majority 0.086 0.084 0.076 0.099 0.101 0.075
(0.094) (0.093) (0.093) (0.094) (0.094) (0.093)
Merger activity 0.001 0.001 0.001 0.001 0.001 0.001
(0.002) (0.002) (0.002) (0.002) (0.002) (0.002)
Acquirer’s prev.-year − 0.114 − 0.109 − 0.117 − 0.126 − 0.113 − 0.078
stock perform.
(0.098) (0.097) (0.096) (0.097) (0.096) (0.098)
Size of the target − 0.065* − 0.064* − 0.054* − 0.060* − 0.061* − 0.058*
(0.027) (0.027) (0.027) (0.027) (0.027) (0.027)
Competition 0.381** 0.339* 0.367** 0.365** 0.362** 0.407**
(0.136) (0.136) (0.134) (0.135) (0.136) (0.134)
Acquisition experience − 0.011 − 0.017 − 0.017 − 0.015 − 0.016 − 0.009
(0.013) (0.013) (0.013) (0.013) (0.013) (0.012)
Directors’ av. prior 0.187 0.163 0.196 0.182 0.204 0.201
acquis. premium
(0.150) (0.148) (0.145) (0.148) (0.143) (0.145)
Directors’ av. prior − 0.230 − 0.224 − 0.237† − 0.232 − 0.247† − 0.224
acquisition size
(0.143) (0.142) (0.140) (0.142) (0.142) (0.141)
Board busyness − 0.172 − 0.160 − 0.155 − 0.154 − 0.164 − 0.177
(0.111) (0.109) (0.109) (0.110) (0.109) (0.109)
Fraction of female − 0.980* − 1.051* − 1.138* − 1.034* − 0.980* − 1.074*
directors
(0.463) (0.458) (0.457) (0.459) (0.459) (0.456)
Target ROA − 0.386*** − 0.385*** − 0.390*** − 0.397*** − 0.364*** − 0.373***
(0.100) (0.099) (0.098) (0.099) (0.100) (0.099)
Target leverage 0.300 0.299 0.284 0.273 0.295 0.357†
(0.193) (0.191) (0.190) (0.192) (0.192) (0.192)
Target Tobin’s Q 0.001 0.001 0.001 0.001 0.001 0.001
(0.004) (0.004) (0.004) (0.004) (0.004) (0.004)
Constant − 0.376 − 0.304 − 0.005 − 0.024 − 0.178 − 0.131
(1.642) (1.626) (1.618) (1.635) (1.629) (1.620)
Year- and industry YES YES YES YES YES YES
dummies
Observations 290 290 290 290 290 290
Adjusted R-squared 0.196 0.209 0.219 0.204 0.206 0.216

Note: two-tailed tests for all variables; standard errors in parentheses; *** p < 0.001, ** p < 0.01, * p < 0.05, † p < 0.1.

13
T. Twardawski and A. Kind
decrease with the acquisitiveness of directors, suggesting that board
directors become overconfident over time.
5.2. Alternative measures of board overconfidence
In this section, we provide results for alternative measures of board
overconfidence. First, we replaced the fraction of overconfident di­
rectors with a dummy variable that equals one if the number of over­
confident board directors exceeds 50 percent and zero otherwise. This
adjustment accounts for the possibility that a majority of overconfident
directors is both a necessary and a sufficient condition for board over­
confidence to matter in acquisition decisions. It complies with the
conjecture that a minority of directors will not deviate from the
consensus and oppose the majority view (Janis, 1982). Table 5, Model 6
shows the results. All else being equal, takeover decisions made by
boards with a majority of overconfident directors trigger excess returns
that are 1.44 percentage points lower than those of boards with a ma­
jority of non-overconfident directors (p < 0.1). Table 6, Model 12 shows
that boards with a majority of overconfident directors pay 24 percent
higher acquisition premiums than other boards (p < 0.05). Since the
exact function that relates overconfident directors with aggregate
overconfidence on the group level is not studied in prior literature and
cannot be exactly predicted on theoretical grounds, we also use lower
and higher cut-off levels as further robustness checks. In Table 5, Model
5 and Table 6, Model 11 we thus show regressions using a 30 percent
cut-off level. In Table 5, Model 7 and Table 6, Model 13 we show re­
gressions using a 70 percent cut-off level. The results suggest that a
fraction of 30 percent overconfident directors is not enough to signifi­
cantly influence investor reactions and acquisition premiums. On the
contrary, a fraction of 70 percent overconfident directors significantly
influences investor reactions and acquisition premiums. These results
further support our findings.
Second, by using the fraction of overconfident directors, our baseline
board overconfidence measure does not capture the influence of an in­
dividual director’s relative power but rather assumes that all directors
have an equal voice in M&A decisions. However, it is certainly
conceivable that board directors may have different power within their
firms. The organizational tenure of a director has a long-standing
theoretical foundation as a measure of the individual impact on a
firm’s decision-making processes (Finkelstein and Hambrick, 1990;
Pfeffer, 1983). Long tenure as a corporate director confers power
through an increased familiarity with the firm’s resources and methods
of operation (Finkelstein, 1992; Zald, 1969). Power, in turn, reflects the
capacity of directors to “bring about the outcomes they desire” through
both formal and informal means (Salancik and Pfeffer, 1977, p. 3). Thus,
to account for the fact that directors who have served the company
longer are more influential, we calculated a tenure-weighted measure of
board overconfidence. Specifically, we multiplied each director’s tenure
with a dummy equal to one if the director is considered overconfident
and zero otherwise. This value is standardized by the sum of all di­
rectors’ tenure. The results show that also this modified overconfidence
measure is negatively related to excess returns (Table 5, Model 8: β =
− 3.14, p < 0.01) and positively related to acquisition premiums
(Table 6, Model 14: β = 0.28, p < 0.05).
Third, our baseline overconfidence measure postulates that board
directors perceive all realized M&A deals as a success. While this view
complies with studies on CEO overconfidence and corporate takeovers
(Billett and Qian, 2008; Doukas and Petmezas, 2008; Zollo, 2009), it is
plausible that board directors use the announcement returns associated
with past takeovers as an indicator of their success (Haleblian et al.,
2006; Kumar et al., 2015). To address this potential concern, we con­
structed an additional overconfidence measure that only counted recent
M&A deals with positive five-day announcement returns. The results
confirm that the negative effect of board overconfidence on excess
returns (Table 5, Model 9: β = − 2.64, p < 0.05) and the positive influ­
ence on acquisition premiums (Table 6, Model 15: β = 0.30, p < 0.05)
14
Journal of Business Research 165 (2023) 114026
remain statistically significant and economically relevant.
Finally, we followed Hayward and Hambrick (1997) and Chen et al.
(2015) and built an overconfidence index based on several indicators of
overconfidence. Our index relies on overconfidence measures that are
commonly used in the management literature (Chen et al., 2015; Hay­
ward and Hambrick, 1997; Lee et al., 2017) to capture general CEO
overconfidence (i.e., not M&A-specific overconfidence) and can be
customized to the board. We obtained this index by conducting a factor
analysis of five overconfidence indicators with an oblique rotation
method (Hayward and Hambrick, 1997). In the factor analysis, we
considered – in addition to the task-related M&A overconfidence mea­
sure of the baseline analysis – recent average firm performance of board
directors (Chen et al., 2015; Hayward and Hambrick, 1997), recent
average media praise of board directors (Chen et al., 2015; Hayward and
Hambrick, 1997), Twitter activity (Lee et al., 2017) of board directors,
and the presence of founders on the board (Lee et al., 2017).15
In particular, for each individual director, we computed the average
stock price performance in the year prior to the acquisition by consid­
ering all companies in which they held a directorship. Then, we
computed for each board of directors the average of the individual di­
rectors’ average stock price performance.
Since media praise may activate overconfidence (Hayward and
Hambrick, 1997), we identified the tone of newspaper articles written
about the companies in which the directors in our sample held positions.
In particular, following Loughran and McDonald (2011), we down­
loaded newspaper articles from USA Today, the New York Times, the
Washington Post, and the Wall Street Journal in the year prior to the
acquisition year. Using the word list of Loughran and McDonald (2011),
we measured the negativity of the newspaper articles by distinguishing
negative from positive or neutral words and by computing their per­
centage share. We focused on negative words because positive and
neutral words can be negated, which may lead to biased estimates. To
measure media praise, we used the negative value of the share of
negative words. Similar to recent average firm performance, for each
individual director, we computed the average media praise in the year
prior to the acquisition by considering all companies in which they held
a directorship. We used the mean of the board directors’ average media
praise as recent average media praise of the entire board. Both recent
average firm performance and recent average media praise were even­
tually standardized by transforming the actual values into their z-scores,
i.e., by subtracting the mean and dividing by the standard deviation at
the board level.
Furthermore, we identified the fraction of directors who were active
on Twitter because this behavior likely indicates that a director is more
(over)confident as he/she proactively seeks to be in the public eye. A
director was viewed as active if he/she posted at least one message in the
year prior to the acquisition. In contrast to Lee et al. (2017), who study
the Twitter activity of CEOs, we did not analyze the tone of the Tweets
because only four percent of all directors in our sample were active on
Twitter.
Finally, we computed the fraction of directors who have founded a
company in the past as an indicator of being prone to overconfidence. In
15
In contrast to recent CEO literature (Chen et al., 2015; Lee et al., 2017), we
do not consider management earnings forecasts and earnings conference calls to
measure board directors’ overconfidence because both forecasts and calls are
solely performed by the top management team (most often solely by the CEO
and the CFO). In addition, we do not consider option exercise behavior for the
following two reasons. First, data on option exercises is not available and
cannot be computed for non-executive directors. Second, although prior liter­
ature (Chen et al., 2015; Lee et al., 2017; Malmendier and Tate, 2008) suggests
that CEOs who hold exercisable options might be overconfident, Doukas and
Petmezas (2008) and Campbell et al. (2011) argue that CEOs may delay exer­
cising options because they have a justified optimism about the firm’s future
performance.
T. Twardawski and A. Kind
fact, it is generally accepted that founders typically tend to overestimate
their abilities and underestimate risk (Lee et al., 2017). The information
on the founding activity of each individual director in our sample was
obtained by screening the data field “fulltextdescription” of BoardEx’s
Individual Profile Employment for the words “founder” and “founding”
(without case sensitivity).
Table A1 of the Appendix shows descriptive statistics on the addi­
tional overconfidence measures. The single factor had an eigenvalue of
0.57, explaining 57 percent of the variance. The factor loadings for the
five variables were as follows: experienced-based overconfidence mea­
sure of our baseline analysis = 0.40; recent average firm performance of
board directors = 0.15; recent average media praise of board directors
= 0.51; Twitter activity of board directors = 0.36; and the fraction of
founders on the board = 0.03. We used these weightings to compute the
overall index.
The results confirmed that also using this alternative board over­
confidence measure, a negative impact on excess returns (Table 5, Model
10: β = − 1.57, p < 0.05) and a positive influence on acquisition pre­
miums (Table 6, Model 16: β = 0.25, p < 0.01) is detected.
While theoretical arguments suggest that all of the above-mentioned
approaches have merit and may proxy for board overconfidence, our
baseline measure shows the highest correlation with optimistic insider
trading (see Appendix, Table A1), which – according to the related prior
literature (Billett and Qian, 2008; Doukas and Petmezas, 2008; Mal­
mendier and Tate, 2008) – is an indication of its higher validity. The
higher validity of the experience-based overconfidence measure is likely
due to its specific M&A related nature. In contrast, the other measures
are general overconfidence proxies unrelated to the specific task of
conducting acquisitions.
5.3. Board overconfidence and acquisition performance
In the baseline analysis, we measure the influence of board over­
confidence on two acquisition outcomes: investor reactions and acqui­
sition premiums paid. Investor reactions, however, may be subject to
information asymmetries and heuristic processing (Schijven and Hitt,
2012). In an unreported analysis, we therefore investigated whether the
investors’ perceptions mirror the actual post-acquisition performance.
We assessed post-acquisition performance by using the accounting
measure return on assets (ROA) which we obtained from Compustat.
ROA is unaffected by investor expectations about the impact of a deal on
a firm’s future performance and thus serves as a reliable measure of the
post-merger integration success (see Graebner et al., 2016, for a review
on post-merger integration). In particular, as dependent variable, we
computed the change in ROA from the year prior to the merger to one
year after the merger. The results showed that investors correctly
anticipate the negative influence of board overconfidence on the post-
acquisition performance. In particular, an increase in the fraction of
overconfident directors of 10 percentage points, e.g., approximately one
additional overconfident director, was, all else being equal, associated
with lower ROA of 0.23 percentage points. This finding strengthens our
argument that (all else being equal) overconfident boards tend to
destroy shareholder value by supporting poor acquisitions.
6. Discussion and conclusion
In this paper, we examine the role of board directors’ overconfidence
in M&A transactions. Overall, our findings provide evidence that the
overconfidence of board directors leads to poorer M&A outcomes. An
empirical analysis based on a sample of 468 public acquisitions in the
period 2009–2013 shows that board overconfidence is negatively
related to excess returns upon merger announcements (a measure of
15
Journal of Business Research 165 (2023) 114026
investor response to a deal) and positively to takeover premiums (a
measure of the willingness to overpay). Our results suggest that the
findings from the CEO literature are likely to overstate the true influence
of CEO overconfidence on shareholder value by capturing some of the
effect of board overconfidence. An additional analysis of insider trading
supports the assumption that board directors become overconfident
through a biased self-attribution in M&A deals, as they increase their
shareholdings prior to subsequent merger deals. Our supplemental
analysis shows (i) that the directors’ overconfidence measure based on
high acquisitiveness is reliable as it is positively correlated with insider
trading, (ii) that the results presented in the paper are robust both to
alternative plausible ways to aggregate individual overconfidence at the
board level and to alternative overconfidence measures, and (iii) that
the investors’ negative short-term reactions to acquisitions made by
overconfident boards mirror the actual post-acquisition performance.
The study contributes in several ways to the extant literature in the
fields of corporate governance, mergers and acquisitions, and over­
confidence. First, this study follows recent suggestions of board scholars
to investigate underexplored board characteristics, such as behavioral
biases, that may affect the board’s decision-making processes (Hambrick
et al., 2008; Johnson et al., 2013). While the importance of board
overconfidence for the performance of corporations has already been
indicated by Almandoz and Tilcsik (2015) – who show that the default
probability of banks depends on the presence of directors with previous
banking experience – this paper broadens the scope significantly. In this
respect, we link our theoretical predictions and empirical analysis more
closely to the CEO overconfidence literature and psychological over­
confidence theory. Our findings suggest that in complex tasks – such as
M&A decisions – overconfidence develops on the individual director
level via biased self-attribution in related activities, and influences
future decisions. In this respect, our study accounts for the fact that
board directors may have additional mandates as executives or board
members in other companies and may therefore likely carry over their
overconfidence from one firm to another.
Second, while the consequence of CEO overconfidence on the quality
of corporate takeovers has been extensively investigated (Billett and
Qian, 2008; Doukas and Petmezas, 2008; Malmendier and Tate, 2008,
among others), this is (to the best of our knowledge) the first paper to
study the effects of board overconfidence on takeover decisions. The
results are new, economically important, and distinct from the CEO
overconfidence effects. Given the central role assigned by the legislature
to boards of directors in monitoring executives and mitigating the
principal–agent conflicts between shareholders and executives, under­
standing the impact of behavioral biases of board directors (and not
CEOs) on M&A outcomes is of great theoretical and practical importance
for governance scholars and practitioners. The inclusion of board
overconfidence as an additional explanatory variable might allow future
studies in the field of mergers and acquisitions to explain a larger portion
of the cross-sectional variation of both excess returns upon merger an­
nouncements and takeover premiums. Our study is also related to the
paper of Zhu (2013) who suggests that, due to group polarization, the
level of takeover premiums paid by a company is influenced by past
premiums experienced by its board directors. Similar to our study, Zhu
(2013) predicts the presence of a behavioral bias in the board of di­
rectors. However, while group polarization suggests that directors’
experience with low-premium deals decreases the board’s likelihood to
overpay, this paper shows that any recent M&A experience can induce
overconfidence in board directors and thus increase their willingness to
overpay.
Third, the findings in this study have implications for research on
corporate boards. The results suggest that directors’ overconfidence
emerges via a positive self-attribution bias in recent activities involving
T. Twardawski and A. Kind Journal of Business Research 165 (2023) 114026

complex tasks and induces variation in the directors’ effectiveness as
strategic decision-makers. Due to overconfidence, board directors think
that they are knowledgeable although they are not. Thus, in spite of a
genuine desire to exercise their fiduciary duties to avoid lawsuits and to
protect their reputation, the wrong evaluation of their skills induces
overconfident directors to make suboptimal decisions. It is important to
note that while the paper argues that (all else being equal) board
overconfidence negatively affects M&A outcomes, it does not take a
stance on whether the average contribution of board of directors on the
quality of M&A decisions is positive or negative. Similarly, the paper
does not aim at reducing the importance of other board characteristics
(e.g., board size, percentage of independent directors, fraction of female
directors, etc.) in influencing M&A decisions.
Finally, our paper tackles the often-raised concerns about the non-
replicability of prior studies with “[…] deleterious consequences for
the development of a cumulative body of knowledge […]” (Hubbard
et al., 1998, p. 243). By replicating and building on the results of CEO
overconfidence on excess returns upon M&A announcements, our paper
contributes in building up a credible body of knowledge in this research
area. In this respect, our analysis provides a particularly robust research
setting by studying the effects of managerial overconfidence on both
excess returns and acquisition premiums, which is rare in M&A studies.
In addition, by considering that CEOs can become overconfident based
on M&A experience gained as a director of another company, we add an
important spill-over dimension to the topic.
Overall, the paper has important consequences for managerial
practices and also highlights a remarkable paradox. While scholars
claim that long-term acquisition experience of board directors can be
beneficial for future takeovers (see, e.g., McDonald et al., 2008), we
show that a high acquisitiveness may capture overconfidence that
negatively influences M&A outcomes. Thus, when proposing new board
members or preparing an M&A deal, it should be taken into account that
directors with no experience may also add to board diversity by being
less prone to exhibit overconfidence and may thus be more effective in
handling upcoming corporate takeovers than directors with consider­
able experience gained in recent years over a short time span.
This study has limitations and offers various directions for future
research. First, while we study directors’ individual overconfidence by
using proxies derived from archival data, future research could exploit
laboratory experiments or surveys frequently used in psychology. More
specifically, lab experiments and surveys are suitable for obtaining more
nuanced measures of individual overconfidence that could then be
related to the outcome of financial decisions made by groups (see e.g.,
Renerte et al., 2023). In addition, our main approach (and also our al­
ternatives presented in the supplemental analysis section) of aggre­
gating individual overconfidence of board members to the group level is
guided by prior research on how characteristics of group members affect
Third, this study concentrates on board overconfidence in takeover
decisions made by large publicly traded U.S. corporations. Future
research may focus on the impact of overconfidence in acquisitions of
non-public firms, firms with fundamentally different governance struc­
tures (e.g., two-tier boards), or firms in other countries. In addition, due
to data availability, we focused on the period between 2009 and 2013.
While the number of M&A deals in our sample is large enough for a solid
statistical evaluation and is in line with prior related literature on
managerial overconfidence, future research could also investigate the
continued validity of our findings.
Fourth, future studies might also explore the impact of directors’
overconfidence on other (strategic) decisions, such as hiring CEOs,
determining CEO compensation, or the nomination of other board di­
rectors. For example, it is conceivable that overconfident directors may
tend to promote other overconfident directors.
Finally, we support the view of Zhu (2013) that building and
extending social psychological theories on group processes to study
collective strategic decisions seems to be a promising avenue for future
research. Notwithstanding these limitations and directions for future
research, this paper increases the understanding of the importance of
behavioral biases for strategic decisions in corporate boards.
CRediT authorship contribution statement
Torsten Twardawski: Conceptualization, Formal analysis, Investi­
gation, Methodology, Data curation, Validation, Visualization, Writing –
original draft, Writing – review & editing. Axel Kind: Conceptualiza­
tion, Data curation, Formal analysis, Investigation, Methodology, Vali­
dation, Writing – original draft, Writing – review & editing.
Declaration of Competing Interest
The authors declare that they have no known competing financial
interests or personal relationships that could have appeared to influence
the work reported in this paper.
Appendix
Table A1
Table A1
Descriptive statistics and correlations of overconfidence indicators.
Mean S.D. 1. 2. 3. 4.

group performance. As of today, the way in which overconfidence in­ 1. Fraction of overconfident 0.53 0.37
fluences interpersonal dynamics at the group level has not been studied. directors (baseline measure)
2. Average Media praise (z-score) 0.00 1.00 0.28
Therefore, theoretical predictions about this issue are beyond the scope
3. Twitter activity 0.04 0.07 0.12 0.25
of this paper. Future studies may theorize these dynamics and test them 4. Average recent firm 0.00 1.00 0.04 0.11 0.03
using the above-mentioned methods. performance (z-score)
Second, our paper contributes to the literature by showing that it is 5. Fraction of founders 0.14 0.13 0.10 0.03 0.14 0.08
not only the overconfidence of a single person that is crucial for M&A
decisions, but also the overconfidence of a group. Specifically, we Correlation p-value
measure the average effect of directors’ overconfidence (gained via with insider
trading
biased self-attribution) on investors’ reactions and acquisition pre­
Fraction of overconfident 0.1019 0.03
miums. Heterogeneous effects in the cross-section of observations and directors
underlying mechanisms have remained outside the scope of this study. Majority of directors is 0.0990 0.04
Future research may focus on theorizing and examining underlying overconfident
channels and moderators of these effects. For instance, both individual Tenure-weighted overconfidence 0.0991 0.04
Overconfidence via positive 0.0788 0.10
directors’ characteristics (e.g., gender, experience, age) and situational feedback
variables (e.g., the complexity of the firms involved in the deals) may Overconfidence Index 0.0653 0.17
influence the extent to which an individual director is prone to over­
Note: S.D.: Standard Deviation.
confidence and under which circumstances behavioral biases, such as
overconfidence, spread in the group.

16
T. Twardawski and A. Kind Journal of Business Research 165 (2023) 114026

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Torsten Twardawski leads a strategy department at a global insurance company and is a
researcher and lecturer at the University of Konstanz (Germany). He received his Doctor of
Economics from the University of Konstanz. His research interests include corporate
governance, corporate strategy, and top management teams.
Axel Kind is professor of corporate finance at University of Konstanz (Germany) and
adjunct professor at ETH Zurich, University of Basel, and University of Sankt Gallen
(Switzerland). He received his PhD from the University of Sankt Gallen and held visiting
research and teaching positions at Stern School of Business of New York University, the
Computer Science Department of University of California, Los Angeles, and the Graduate
School of Business of Columbia University. His research focuses on the influence of
managerial and governance characteristics on organizational outcomes.