CAPM-Based Company (Mis)valuations
68 Pages Posted: 11 Oct 2017 Last revised: 25 May 2018
Date Written: May 25, 2018
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.
Keywords: Capital Budgeting, Valuation, Mergers and Acquisitions, Capital Asset Pricing Model
JEL Classification: G31, G34, G41
Suggested Citation: Suggested Citation