Research suggests that overconfident CEOs are as much as 65 percent more likely to make an acquisition than their more grounded peers.
Killian McCarthy is a Professor of Strategy at Radboud University. He has studied the performance of more than 500,000 mergers and acquisitions and in this column points to some of the biggest causes of their success and failure.
When a major deal collapses, we blame the integration, the market, or the synergies that never materialised. But sometimes, the real problem is much simpler: the CEO believed their own hype.
Welcome to the world of M&A hubris where overconfidence, ambition, and a lack of challenge combine to destroy billions in shareholder value.
The psychology of overreach
Why do smart CEOs pursue bad deals? The answer, in many cases, is hubris: that is, an inflated sense of confidence that clouds judgment and elevates personal conviction above market logic.
Research suggests that overconfident CEOs are as much as 65 percent more likely to make an acquisition than their more grounded peers (Malmendier & Tate, 2008).
And when they do, they tend to pay up to 20 to 30 percent higher premiums, and to deliver 10 to 15 percent less in terms of long-term returns to shareholders on average (Hayward & Hambrick, 1997; Aktas, de Bodt, & Roll, 2009).
In one study, firms led by overconfident CEOs underperformed their industry peers by up to 17 percent in the three years following a major acquisition.
When the mirror lies
Take Microsoft’s 2013 acquisition of Nokia’s handset business. Then-CEO Steve Ballmer had a clear goal: make Microsoft a mobile-first company. But the world had moved on and Apple and Android had already won.
Internally, not everyone agreed with the deal, but Ballmer pressed ahead anyway. The result was a 7.6 billion dollar write-down; one of the biggest write-downs in Microsoft’s history. In the fall out, the company laid off tens of thousands of employees, shuttered the product line, and quietly exited the phone market altogether.
And when confidence is grounded
But confidence isn’t always dangerous. When channelled correctly – when grounded in strategy, challenged by advisors, and tempered by governance – it can produce transformative deals.
Look at Satya Nadella’s tenure at Microsoft. Under his leadership, Microsoft has made a series of major acquisitions – LinkedIn, GitHub, Activision – that have expanded the firm’s reach and capabilities.
But these weren’t ego-driven moves. They aligned clearly with Microsoft’s cloud, enterprise, and platform strategy. The integrations were thoughtful, the valuations reasonable, and the board engaged.
Nadella himself is known for humility and openness to challenge. And perhaps because of this, Microsoft’s market capitalisation has more than tripled since 2014. The deals worked not because Nadella lacked confidence, simply because he didn’t mistake confidence for infallibility.
What to watch for
Research suggests that as CEOs accumulate wins, cognitive distortions set in: the fundamental attribution error credits random outcomes into personal brilliance, while self-attribution bias transforms praise into validation. Over time, boldness becomes a brand, and acquisitions shift from being strategic bets to being more about personal legacies.
Success may plant the seed of overconfidence, but structure helps it grow. When CEOs receive bonuses tied to deal size, not deal quality, it rewards boldness over discipline.
In some firms, a single acquisition can trigger 50 to 70 percent of annual compensation. Add CEO–chair duality (+28% more likely to pursue risky acquisitions), founder control (34%), or dual-class shares (+25%), and overconfidence becomes institutionalized.
The warning signs become increasingly visible from the outside: boards that never say no, loyalists replacing dissenters, a string of splashy, identity-defining deals with weak fit, and a refusal to revisit past mistakes. Together, these structural and behavioral cues reveal a system where challenge is muted and conviction reigns. If boldness is never questioned, hubris isn’t an accident, it’s the result.
What the mirror won’t tell you
In the world of M&A, where more than 70 percent of deals continue to go wrong, the most dangerous person in the room is often the one who’s most certain they’re right.
If you're working with an overconfident CEO, that means governance must do what psychology won't: push back and stress test. The board needs to come in early, along with independent deal reviewers, and CEO compensation needs to be shifted to long-term value.
If you're targeting a firm led by on overconfident CEO, you need to understand that you’re not negotiating with logic, you’re negotiating with ego. Expect that the CEOs will be unwilling to concede value, overstate synergies, and resist integration control.
So what should you do? Slow the process. Pressure-test their assumptions. Build in earn-outs, clawbacks, or staged payments. And most importantly, prepare for a difficult integration.
In the end, the message is clear. CEO Hubris won’t show up in your discounted cash flow. But it might be the most expensive item in the deal.
READ ALSO: Acquisition with a mission: why motivation determines success
