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:
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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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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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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:70:y:2015:i:3:p:1253-1285
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