&a hubrisHUBRIS HYPOTHESIS
The Hubris hypothesis implies that managers seek to acquire firms for their own personal motives and that the pure economic gains to the acquiring firm are not the sole motivation or even the primary motivation in the acquisition. It is argued that the evidence supports the hubris hypothesis as much as it supports other explanations such as taxes, synergy, and inefficient target management. The key element in this series of events is the valuation of an asset (the stock) that already has an observable market price. The pre-existence of an active market in the identical item being valued distinguishes takeover attempts from other types of bids, such as for oil-drilling rights and paintings. These other assets trade infrequently and no two of them are identical. This means that the seller must make his own independent valuation. There is symmetry between the bidder and the seller in the necessity for valuation. In takeover attempts, the target firm shareholder may still conduct a valuation, but it has a lower bound, the current market price. The bidder knows for certain that the shareholder will not sell below that; thus when the valuation turns out to be below the market price, no offer is made Theory predicts that the winning bid is an accurate assessment of value. In takeovers, however, if the initial bid (by the market) wins the auction, we throw away the observation. If all bidders accounted properly for the "winner's curse," there would be no particular bias associated with discarding bids won by the market; but if bidders are infected by hubris, the standard bidding theory conclusion would not be valid Unless there is something curative about the public nature of corporate takeover auctions, we should at least consider the possibility that the same phenomenon exists in them. The hubris hypothesis is consistent with strong-form