CAPM-Based Company (Mis)valuations

Jacques Olivier (), Olivier Dessaint (), Clemens A. Otto () and David Thesmar

No 1235, HEC Research Papers Series from HEC Paris

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.

Keywords: Capital Budgeting; Valuation; Mergers and Acquisitions; Capital Asset Pricing Model (search for similar items in EconPapers)
JEL-codes: G31 G34 G41 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2017-10-01, Revised 2018-03-20
New Economics Papers: this item is included in nep-cfn and nep-fmk
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: CAPM-Based Company (Mis)valuations (2018)
Working Paper: CAPM-Based Company (Mis)valuations (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1235

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