The WACC Fallacy: The Real Effects of Using a Unique Discount Rate

Philipp Krüger, Augustin Landier and David Thesmar
Authors registered in the RePEc Author Service: Philipp Krueger

Journal of Finance, 2015, vol. 70, issue 3, 1253-1285

Abstract: type="main">

In this paper, we test whether firms properly adjust for risk in their capital budgeting decisions. If managers use a single discount rate within firms, we expect that conglomerates underinvest (overinvest) in relatively safe (risky) divisions. We measure division relative risk as the difference between the division's asset beta and a firm-wide beta. We establish a robust and significant positive relationship between division-level investment and division relative risk. Next, we measure the value loss due to this behavior in the context of acquisitions. When the bidder's beta is lower than that of the target, announcement returns are significantly lower.

Date: 2015
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Citations: View citations in EconPapers (54)

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Related works:
Working Paper: The WACC Fallacy: The Real Effects of Using a Unique Discount Rate (2011)
Working Paper: The WACC Fallacy: The Real Effects of Using a Unique Discount Rate (2011)
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