Assistant Professor of Finance
JEL Classification: G31; G34; G41;
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.The authors test this hypothesis using M&A data and show that bids for low-beta private targets entail lower bidder returns. The authors provide further support by testing several ancillary predictions.The authors' 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.