Does the CAPM drive misvaluations in M&As?

Hark, Paul F.; Schneider, Christoph

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.