Question

The hubris hypothesis suggests that managers continue to engage in acquisitions, even though, on average, they do not generate economic profits, because of the unrealistic belief on the part of these managers that they can manage a target firm’s assets more efficiently than that firm’s current management. This type of systematic irrationality usually does not last too long in competitive market conditions: Firms led by managers with these unrealistic beliefs change, are acquired, or go bankrupt in the long run. What are the attributes of the market for corporate control that suggest that managerial hubris could exist in this market, despite its performance-reducing implications for bidding firms?

Answer 1

The market that exists for the corporate control is not the one which is always perfect. In the everchanging conditions of the economy and the market, information asymmetry is created when there is imperfect market conditions occuring in the economy. Because of lack of information and also proper communication within various resources and places, many managers tend to believe that they would have access for more or better information that would eventually allow them to be successful for the Mergers and Acquisitions activity. Also, many managers may also believe that they can act quick for the Mergers and Acquisitions opportunities and grow their business very well because of the lack of information. Such attributes like the information asymmetry and the benefit of the speed in the market would then promote managerial hubris in the economy.