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Does the CAPM drive misvaluations in M&As?

Author

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  • Paul F. Hark

    (University of Münster)

  • Christoph Schneider

    (University of Münster)

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.

Suggested Citation

  • Paul F. Hark & Christoph Schneider, 2025. "Does the CAPM drive misvaluations in M&As?," Journal of Business Economics, Springer, vol. 95(2), pages 427-463, April.
    • Handle: RePEc:spr:jbecon:v:95:y:2025:i:2:d:10.1007_s11573-024-01216-5
    DOI: 10.1007/s11573-024-01216-5
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    More about this item

    Keywords

    Mergers & acquisitions; CAPM; Capital budgeting; Valuation errors;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • 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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