Essays on behavioural perspectives on corporate decisions: A real options approach

Abstract

Essay 1 studies how managerial overconfidence, defined as a miscalibration bias, affects the timing and terms of mergers and acquisitions. Using a real options framework, I show that overconfident acquirers lead to earlier mergers in which the terms of the deal favour target firms. Acquirers' overconfidence results in positive (negative) announcement returns for the target (acquirer) and overall value destruction. When deals are hostile, announcement returns for both firms are higher, and overconfidence creates value. I present empirical evidence that strongly supports the model´s predictions. Essay 2 studies how managerial overconfidence, defined as an overestimation of signal precision, affects the timing and terms of merger deals. Using a real options model that combines imperfect information and learning, I show that information-based overconfident managers overreact to information, delaying merger deals. Unlike other forms of overconfidence, firms benefit from this bias, with the terms of the deal being beneficial to firms with overconfident managers. Deals are characterized by positive pre-announcement returns for both firms and positive (negative) announcement returns for the biased (rational) firm. Essay 3 studies how heterogeneity in beliefs affects investment decisions. I analyze a canonical real options investment problem from the perspective of a three-member group that must decide through majority voting. I show that when both the project's value and the investment costs are uncertain, belief heterogeneity becomes a key characteristic, as group’s investment behaviour can not always be represented by any member or subset of the group.