The literature on mergers and acquisitions, starting with Roll (1986) has often addressed the issue of managerial hubris leading to overpayment in acquisitions. For example, the observation of statistically and economically significant negative bidder returns for public bidder acquisitions is frequently attributed to the winner’s curse, managerial overconfidence, and thus overpayment. However, in our paper, Bidder Hubris and Founder Targets, which was recently made publicly available on SSRN, we argue that positive bidder gains are not necessarily inconsistent with overpayment, nor are negative bidder returns always a direct consequence of overpayment.

Insofar as managerial hubris leads to overpayment in acquisitions, it is important to note that this overconfidence derives from two non-mutually exclusive sources: (i) the target’s stand-alone value under bidder’s control is overestimated or (ii) synergies from the combined entity are overestimated. To the best of our knowledge, this is the first paper that tries to disentangle these two factors, while not relying on proxies for overconfidence or focusing exclusively on average bidder gains as evidence of managerial hubris. In this paper, we provide a unique test of the first source of overpayment by isolating a part of the target’s ex-ante value that is attributable to a founder CEO and relating this to bidder gains.

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