Question: The hubris hypothesis suggests that managers continue to engage in
The hubris hypothesis suggests that managers continue to engage in acquisitions, even though on average they do not generate economic profits, because of the unrealistic belief on the part of these managers that they can manage a target firm’s assets more efficiently than that firm’s current management. This type of systematic non-rationality usually does not last too long in competitive market conditions. Firms led by managers with these unrealistic beliefs change, are acquired, or go bankrupt in the long run. Can the hubris hypothesis be a legitimate explanation for continuing acquisition activity?
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