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
Citation
DESSAINT, Olivier; OLIVIER, Jacques; OTTO, Clemens A.; and THESMAR, David.
CAPM-based company (mis)valuations. (2021). Review of Financial Studies. 34, (1), 1-66.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6566
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1093/rfs/hhaa049