CAPM-Based Company (Mis)valuations

68 Pages Posted: 11 Oct 2017 Last revised: 25 May 2018

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)

Multiple version iconThere are 2 versions of this paper

Date Written: May 25, 2018

Abstract

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

Dessaint, Olivier and Olivier, Jacques and Otto, Clemens A. and Thesmar, David, CAPM-Based Company (Mis)valuations (May 25, 2018). 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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