Managerial overconfidence in High and Low valuation markets: Evidence from the UK

In this paper we empirically investigate the interaction between managerial overconfidence and overall stock market valuation. Using a sample of UK acquisitions in the period 1990-2005, we provide evidence that this interaction is a key determinant of the bidder announcement returns. We show that, in the short-run, acquisitions by firms run by non-overconfident managers outperform those completed by overconfident managers. This result is mainly due to the different results obtained in low valuation markets, where overconfidence leads to lower returns in acquisitions of private companies. This result is robust to several acquirer and deal characteristics and has implications that during crisis, at least for what concerns acquisitions, firms may be better off without overconfident managers