Strategic Roles of Managerial Over-confidence: a Behavioral Theory of Mergers and Technology Updates
Date Issued
2015
Date
2015
Author(s)
Lin, Shu-Yu
Abstract
The objective of this paper is to propose a model that allows for the presence of over-confidence, with over-estimate information type and under-estimate information type, and that incorporates the empirical and experimental findings as an evidence to illustrate the effect of managerial traits towards the industrial competitive advantage, the timing of technology update, and the merger. The main results are listed below: 1. The wrong belief of the information of the over-confidence entrepreneurs in a duopoly Cournot quantity-setting competition, via strategic complementarity, constitutes a commitment, which brings them a competitive advantage if they are optimistic about the future, and othterwise a disadvantage if they are pessimistic about the future. 2. With the discretionary monetary policy proposed by the Government, the output adaption decision made by at least one of the entrepreneurs will lead to the increase of the volatility of the equilibrium product price. 3. The rational entrepreneur facing the overconfident entrepreneur will not take an irrational status quo bias action but make a rational profit maximization decision. 4. The reason why the merger happens is that, in the duopoly market, the firm operated by the optimistic entrepreneur will be the acquiring firm and the other firm operated by the pessimistic entrepreneur will be the target firm, and that their action will enhance the firm’s competitive advantage. 5. After the merger succeeded, the stock price of both the rational acquiring firm and target firm will increase, and that of the rival firm will decrease. In addition, the consumer surplus will increase.
Subjects
over-confidence
discretionary monetary policy
status-quo bias
technology update
merger
Type
thesis
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