Publication Type

Journal Article

Version

submittedVersion

Publication Date

1-2021

Abstract

There is a discrepancy between CAPM-implied and realized returns. Using the CAPM in capital budgeting -- as recommended in textbooks -- should thus have real effects. For instance, low beta projects should be valued more by CAPM-users than by the market. We test this hypothesis using M&A data and show that bids for low-beta private targets entail lower bidder returns. We provide further support by testing several ancillary predictions. Our analyses suggest that using the CAPM when valuing targets leads to valuation errors (relative to the market's view) corresponding on average to 12% to 33% of the deal values.

Keywords

Capital Budgeting, Valuation, Mergers and Acquisitions, Capital Asset Pricing Model

Discipline

Corporate Finance | Finance and Financial Management

Research Areas

Finance

Publication

Review of Financial Studies

Volume

34

Issue

1

First Page

1

Last Page

66

ISSN

0893-9454

Identifier

10.1093/rfs/hhaa049

Publisher

Oxford University Press (OUP): Policy F - Oxford Open Option D

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1093/rfs/hhaa049

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