External Factors’ Effect on CEO Overconfidence in Mergers and Acquisitions: Board Composition and Monitoring

Sammanfattning: Purpose: The purpose of this report is to examine the presence of CEO overconfidence in Sweden, and how monitoring of the board of directors affects the overconfidence in CEOs in Sweden. Methodology: Two proxies were used to measure overconfidence: OC1 which measured CEO insider trading, and OC2 which measured CEO portrayal in media. A multivariate regression using the ordinary least squares method was performed on the data sample. Theoretical perspectives: This study is influenced by previous published articles related to CEO overconfidence and the board of directors’ role as a monitoring organ. These articles include the works of Malmendier & Tate, Doukas & Petmezas, Brown & Sarma and several others. Empirical foundation: A main sample consisting of 375 overconfident acquisitions was constructed from all acquisitions performed by Swedish companies during the time period 2000 to 2007. From this a sub sample was created of which 86 CEOs displaying overconfidence from at least one of the two proxies. Conclusions: This study shows that outside directors have a very effective mean of curtailing observed overconfidence in CEOs. The variables for the CEOs- and employee representatives’ presence on the board of directors was found to be statistically insignificant and with a low effect on observed CEO overconfidence.