CEO-CFO Relative Optimism and Firm Mergers and Acquisitions

Abstract

Our paper examines two critical members in the top management “subteam” – CEO and CFO – in firms’ merger and acquisition (M&A) decision. We propose a concept of CEO-CFO relative optimism, measured by CEO’s optimism relative to CFO’s pessimism, to capture the subteam’s collective cognitive schema in attentional focus and information processing, and study their conjoined influence on corporate decisions. We posit that firms with high CEO-CFO relative optimism will undertake more acquisitions than firms with low CEO-CFO relative optimism because optimistic CEOs are less attentive to risk associated with acquisitions in the absence of CFOs high in pessimism. In addition, the role of CEO-CFO relative optimism in affecting M&A intensity is more pronounced when CFOs are board members at focal firms and firms face a dynamic external environment, because CFO’s opinions are more salient in these situations. Furthermore, acquisitions by firms with high CEO-CFO relative optimism will have a more negative influence on firm operating performance than those with low CEO-CFO relative optimism. Using a sample of U.S. public firms over the period of 2002-2013, we find empirical support for our arguments.