CAPM-Based Company (Mis)valuations

90 Pages Posted: 11 Oct 2017 Last revised: 13 Sep 2019

See all articles by Olivier Dessaint

Olivier Dessaint

University of Toronto - Rotman School of Management

Jacques Olivier

HEC Paris - Finance Department; Centre for Economic Policy Research (CEPR)

Clemens A. Otto

Singapore Management University - Lee Kong Chian School of Business

David Thesmar

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA)

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Date Written: September 11, 2019

Abstract

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

Dessaint, Olivier and Olivier, Jacques and Otto, Clemens A. and Thesmar, David, CAPM-Based Company (Mis)valuations (September 11, 2019). Rotman School of Management Working Paper No. 3050928; HEC Paris Research Paper No. FIN-2017-1235. Available at SSRN: https://ssrn.com/abstract=3050928 or http://dx.doi.org/10.2139/ssrn.3050928

Olivier Dessaint

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Jacques Olivier

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
+33 1 3967 7297 (Phone)
+33 1 3967 7085 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Clemens A. Otto

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

David Thesmar (Contact Author)

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States
16172259767 (Phone)

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