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CAPM-Based Company (Mis)valuations
[Credit lines as monitored liquidity insurance: Theory and evidence]

Author

Listed:
  • Olivier Dessaint
  • Jacques Olivier
  • Clemens A Otto
  • David Thesmar

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.

Suggested Citation

  • Olivier Dessaint & Jacques Olivier & Clemens A Otto & David Thesmar, 2021. "CAPM-Based Company (Mis)valuations [Credit lines as monitored liquidity insurance: Theory and evidence]," The Review of Financial Studies, Society for Financial Studies, vol. 34(1), pages 1-66.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:1:p:1-66.
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    Cited by:

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    2. Itay Goldstein, 2023. "Information in Financial Markets and Its Real Effects," Review of Finance, European Finance Association, vol. 27(1), pages 1-32.

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    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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