Does the CAPM drive misvaluations in M&As?

Paul F. Hark () and Christoph Schneider ()
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Paul F. Hark: University of Münster
Christoph Schneider: University of Münster

Journal of Business Economics, 2025, vol. 95, issue 2, No 8, 427-463

Abstract: Abstract This paper confirms the positive empirical relationship between CAPM-implied target asset betas and bidder announcement returns originally documented by Dessaint et al. (Rev Financ Stud 34(1):1–66, 2021) for U.S. takeover bids. We successfully replicate the main regression results qualitatively for the original and an extended sample period. However, the relationship is statistically insignificant in the European market for corporate control, although it appears to be economically meaningful. Additional tests indicate that bidder announcement returns are only related to target asset betas during merger waves and in horizontal mergers and acquisitions. These findings suggest that the relationship between target asset betas and bidder announcement returns is not driven by a CAPM-induced misvaluation of target firms. Therefore, recommendations to abandon the CAPM for capital budgeting decisions do not seem warranted.

Keywords: Mergers & acquisitions; CAPM; Capital budgeting; Valuation errors (search for similar items in EconPapers)
JEL-codes: G14 G31 G34 G41 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11573-024-01216-5

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