CAPM-Based Company (Mis)Valuations

59 Pages Posted: 2 Jan 2018

See all articles by Olivier Dessaint

Olivier Dessaint

INSEAD

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

MIT Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2017

Abstract

There is a discrepancy between CAPM-implied and realized returns. As a result, using the CAPM in capital budgeting decisions - as is recommended in finance textbooks should have valuation effects. For instance, low beta projects are expected to be valued more by CAPM-using managers than by the market. This paper empirically tests this hypothesis using publicly announced M&A decisions. We show that takeovers of lower beta targets are accompanied by lower CARs for the bidder. Consistent with our hypothesis, the effect is more pronounced for larger acquisitions, higher growth targets, and private targets. Furthermore, low beta bidders are more likely to use their own stock to finance the deal. More generally, low beta firms are less likely to issue equity, and more likely to repurchase shares. These effects are not reversed in the long-run, suggesting that CAPM-using managers may be irrational, though this last test lacks power.

Suggested Citation

Dessaint, Olivier and Olivier, Jacques and Otto, Clemens A. and Thesmar, David, CAPM-Based Company (Mis)Valuations (December 2017). CEPR Discussion Paper No. DP12526, Available at SSRN: https://ssrn.com/abstract=3095576

Olivier Dessaint (Contact Author)

INSEAD

Boulevard de Constance
77305 Fontainebleau Cedex
France

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

MIT Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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