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 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 an...

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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 2021
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/6566
https://ink.library.smu.edu.sg/context/lkcsb_research/article/7565/viewcontent/CAPM_based_Co_MisValuation_sv.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 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.

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