Beware the Winner's Curse: Victories that Can Sink You and Your Company
G. Anandalingam and Henry C. Lucas
Abstract
In the case of an acquisition or a merger, it is very often the case that when an individual or company perceives itself to be the winner, subsequent events will show that the victory was overvalued. Both psychological and market based forces often lead managers to greatly overestimate what they are buying, resulting in the “winner’s curse”. In an effort to grow their companies, competitive and overly confident managers with high compensation packages make rash decisions. The pressure put on values by the stock market, stock analysts, and investment bankers is coupled with the presence of a bi ... More
In the case of an acquisition or a merger, it is very often the case that when an individual or company perceives itself to be the winner, subsequent events will show that the victory was overvalued. Both psychological and market based forces often lead managers to greatly overestimate what they are buying, resulting in the “winner’s curse”. In an effort to grow their companies, competitive and overly confident managers with high compensation packages make rash decisions. The pressure put on values by the stock market, stock analysts, and investment bankers is coupled with the presence of a bidding psychology. When senior management experiences “buyer’s remorse”, having made overly optimistic forecasts about the future of the company, a true financial “curse” often ensues. In the event that a company does “win” by making it to the top of its industry, complacency or hubris caused by a sense of invulnerability often conspire to move the company out of the winner’s column. This book examines the phenomenon of the “winner’s curse”. It presents a number of cases illustrating the curse, and examines the reasons for it in each instance. It also looks at situations where CEOs decided to walk away from “winning” because of their sober ability to trade-off the risks of winning versus the real returns. In particular, the last chapter presents a series of “take-aways” for any manager to follow to avoid the winner’s curse.
Keywords:
mergers,
acquisitions,
hubris,
managerial optimism,
compensation,
growth pressures,
bidding psychology,
investment banking,
stock
Bibliographic Information
| Print publication date: 2004 |
Print ISBN-13: 9780195177404 |
| Published to Oxford Scholarship Online: September 2007 |
DOI:10.1093/acprof:oso/9780195177404.001.0001 |
Authors
Affiliations are at time of print publication.
G. Anandalingam, author
Author Webpage
Henry C. Lucas, author
both at the Robert H. Smith School of Business, University of Maryland
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