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?

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Answer 1

Answer:- The attributes of the market for corporate control that suggest that despite its performance-reducing implications, managerial hubris could exist in this market are:-

1) Overconfidence of the managers to believe that they can manage the acquiring company more efficiently than the existing management of the company.

2) Because of the good performance of the company in the past, they are likely to suffer from hubris.

3) When the company is in a high sense of power, it drives the managers to become overconfident about their knowledge, abilities, and predictions.

4) Lack of voice in the company to speak up against the CEO.

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