CAPM-based company (mis)valuations

CAPM-based company (mis)valuations

There is a discrepancy between CAPM-implied and realized returns. Using the CAPM in capital budgeting -- as recommended in finance textbooks -- should thus have valuation effects. For instance, low beta projects should be valued more by CAPM-using managers than by the market. This paper empirically...

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Bibliographic Details
Main Authors: DESSAINT, Olivier, OLIVIER, Jacques, OTTO, Clemens A., THESMAR, David
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2018
Subjects:
Capital Budgeting
Valuation
Mergers and Acquisitions
Capital Asset Pricing Model
Corporate Finance
Finance and Financial Management
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/5925
https://ink.library.smu.edu.sg/context/lkcsb_research/article/6924/viewcontent/SSRN_id3050928.pdf
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Institution: Singapore Management University
Language: English
Description
Summary:There is a discrepancy between CAPM-implied and realized returns. Using the CAPM in capital budgeting -- as recommended in finance textbooks -- should thus have valuation effects. For instance, low beta projects should be valued more by CAPM-using managers than by the market. This paper empirically tests this hypothesis using publicly announced M&A decisions and shows that takeovers of lower beta targets are accompanied by lower cumulative abnormal returns for the bidders. Specifically, our estimates imply an average net loss to bidders corresponding to 12% of the average deal value and exceeding USD 10 billion per year in aggregate.

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