CAPM-based company (mis)valuations

• 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
• Institution: Singapore Management University

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.