The industry shock and market misvaluation hypotheses of merger waves, bidder CEO overconfidence and CEO turnover: an empirical investigation

[Truncated abstract] This study is conducted in order to validate Harford‘s (2005) research methodology in testing the existence of merger waves and also to re-examine whether merger waves can be explained by the neoclassical hypothesis and/or the behavioural hypothesis. It is alleged that merger waves identified using Harford‘s methodology could be affected by the samples selected. A sample of merger from the period of 1991 to 2000 which consists of successful and unsuccessful M&As are tested and 28 merger waves are identified from the sample. Twenty of these waves are identical to those found by Harford but thirteen starting dates of the waves differ from those of Harford. In addition, unlike Harford, this study finds that not only the abnormally high changes but also the abnormally low changes in the variables related to the neoclassical hypothesis drive the merger waves. The most consistent finding between this and Harford‘s study is that the observable economic shocks are more likely to lead to industry merger waves and those merger waves cluster when capital liquidity is relatively high. This study also examines whether the premiums paid to target firms and the bidders‘ post merger operating performance are affected by bidder CEO behaviour, period of merger, method of payment, industry of merged firms, capital liquidity, and pre-merger operating performance. To conclude, this study finally investigates whether all of these variables play a significant role on the likelihood of bidder CEO turnovers. Testing the US successful M&A data from the period of the 1990s, this study finds that CEOs pay high merger premiums for mergers that are undertaken during merger waves and in the year of high capital liquidity. These suggest that bidders pay high premiums for in-wave mergers when they have better access to economical source of fund to accommodate the reallocation of assets...