CAPM-Based Company (Mis)valuations
Name
SSRN-id3050928.pdf
Description
Submitted version
Size
982.19 KB
Format
Adobe PDF
Checksum (MD5)
34c529915f96366c1a571f4f5041422d
Author(s)
Dessaint, Olivier
Olivier, Jacques
Otto, Clemens A
Thesmar, David
Date Issued
2021
Journal
Review of Financial Studies
Publisher
Oxford University Press (OUP)
Version
Original manuscript
Abstract
© 2020 The Author(s) 2020. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. 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.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1093/RFS/HHAA049
