CAPM-Based Company (Mis)valuations

Credit lines as monitored liquidity insurance: Theory and evidence

Olivier Dessaint, Jacques Olivier, Clemens A Otto and David Thesmar

The Review of Financial Studies, 2021, vol. 34, issue 1, 1-66

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.

JEL-codes: G31 G34 G41 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (5)

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