CAPM-Based Company (Mis)valuations
90 Pages Posted: 11 Oct 2017 Last revised: 31 Oct 2019
Date Written: October 24, 2019
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
JEL Classification: G31, G34, G41
Suggested Citation: Suggested Citation