The Impact of Financial Crisis CEO Overconfidence and Cultural Distance on Acquisition Value Creation: An Empirical Study on European Acquisitions Between 1999-2018

Anders Hess Christensen & Jonas Vendelbo Olesen

Student thesis: Master thesis


The last few decades have seen increasing globalisation and new technologies continuously being innovated more rapidly, which drives economic growth. At the same time acquisitions have become a gradually more popular expansion strategy for CEOs. One feature of acquisitions is their tendency to occur in waves. Six waves during the last century are commonly pointed out in the literature and two of those occurred recently, but were abruptly ended due to financial crises. It appears that financial crises occur within shorter time spans. Consequently, this paper contributes by investigating how acquisitions are affected by financial crises while also studying the CEO’s acquisition history, and cultural distance. A thorough analysis of 1,453 acquisitions undertaken by European companies from 1999 to 2018 is conducted by applying the event study methodology. The value creation is measured using the acquirer’s shareholders’ return on the share price around the announcement. It is estimated using a [-1;1], [-5;5], and [-10,10] event window and by utilising both a market model with local indices and European index as well as the constant mean return model. A battery of seven statistical tests is applied to test the overall announcement return while a cross-sectional regression is conducted to delve deeper into which factors affect the cumulative abnormal return. The findings in this paper can be summarised as: (i) The acquisitions lead to a statistically significant value creation of approximately 1% around announcement. The result is significant across the three return models and event windows. (ii) We find evidence of a financial crisis having a negative impact on the shareholder return. This negative impact is caused solely by the Dot-com Crisis, which has significantly lower returns than the 2008 Financial Crisis. (iii) Contrary to previous literature, this paper finds that acquiring a financial distressed target results in lower CAR. However, the result is insignificant due to a difference between acquisitions of distressed and very distressed targets. Moreover, it is found that acquiring a distressed target during crisis results in greater CAR, possibly because of larger bargaining power for acquirer. (iv) Weak evidence is presented showing that CEO’s higher order deals lead to significantly lower return due to overconfidence caused by the self-attribution bias. The overconfidence is dominated by the CEO’s acquisition experience when acquiring during a crisis, thus, resulting in a positive relationship. (v) Domestic acquisitions generate significantly higher returns than cross-country acquisitions. (vi) Cultural distance has no relationship with CAR for the crosscountry acquisitions. We find signs of polynomial relationships between cultural distance and CAR depending on the relatedness of the target, however, they cannot be confirmed statistically.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2019
Number of pages206