Equity Valuation Using Multiples: An Empirical Investigation

Introduction 51.2 Research ideaThe main objective of this book is to investigate the role of multiples in equityvaluation and to advance the standard multiples valuation method into a comprehensiveframework for using multiples in equity valuation, which corresponds toeconomic theory. Breaking down the main objective involves the formulation ofancillary objectives and research questions, which I separate into two differentparts: a theoretical part and an empirical part.Based on the underlying concept of market-based valuation and the strengthsand weaknesses of the standard multiples valuation method, I establish three researchquestions for the theoretical construction of the comprehensive multiplesvaluation framework in a first step. In the course of developing answers to the firstquestions, several new problems arise, which I address through empirical research.Thus, I also formulate seven additional research questions for the empirical studyand the advancement of the comprehensive multiples valuation framework.1.2.1 Research questions for the theoretical partFor the theoretical construction of the model, I maintain the four-step processof the standard multiples valuation model. More precisely, I first address generalissues of the standard approach and then examine crucial aspects of any single stepin more detail.The loose definition of a firm’s multiple as the ratio of a market price variableto a particular value driver implies both; on one hand ample scope, but on the otherhand a high degree of uncertainty. Uncertainty, because the definition does not tell auser which market price variable or which value driver she has to use in specificcontexts. In fact, she can choose between two market price variables – i.e., stockequityentityprice or market capitalization ( p ) and enterprise value ( p ) – and, basically,any value driver, typically from the financial statements. 8 The first research ques-8 The market capitalization of a firm equals the market value of common equity. The enterprisevalue of a firm equals the sum of the market value of common equity and the market value of netnet debtdebt ( p ).