Discussion paper

DP12526 CAPM-Based Company (Mis)valuations

There is a discrepancy between CAPM-implied and realized returns. As a result, using the CAPM in capital budgeting decisions { as is recommended in fi nance textbooks should have valuation e ffects. For instance, low beta projects are expected to be valued more by CAPM-using managers than by the market. This paper empirically tests this hypothesis using publicly announced M&A decisions. We show that takeovers of
lower beta targets are accompanied by lower CARs for the bidder. Consistent with our hypothesis, the e ffect is more pronounced for larger acquisitions, higher growth targets, and private targets. Furthermore, low beta bidders are more likely to use their own stock to finance the deal. More generally, low beta firms are less likely to issue equity, and more likely to repurchase shares. These eff ects are not reversed in the long-run, suggesting that CAPM-using managers may be irrational, though this last test lacks power.


Thesmar, D and J Olivier (2017), ‘DP12526 CAPM-Based Company (Mis)valuations‘, CEPR Discussion Paper No. 12526. CEPR Press, Paris & London. https://cepr.org/publications/dp12526