Review of Financial Studies Vol. 34 No. 1 2021

CAPM-Based Company (Mis)valuations

Olivier Dessaint¹; Jacques Olivier²; Clemens A. Otto³; David Thesmar⁴

¹ Rotman School of Management, University of Toronto · ² HEC Paris · ³ Lee Kong Chian School of Business, Singapore Management University , · ⁴ MIT Sloan and CEPR

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.

DOI

10.1093/rfs/hhaa049

Volume

34

Issue

1

Pages

1-66

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓