Equity Valuation Using Multiples: An Empirical Investigation

Literature review 15Finally, Spremann (2002) picks up the distinction between trading and transactionmultiples, which is a crucial aspect in practice. The former serve for tradingpurposes (i.e., buying and selling small proportions of a stock); the latter determinethe value of corporate transactions. Hence, the distinguishing feature is the magnitudeof the transaction. Corporate transactions involve a substantial change in theownership structure, which usually goes hand in hand with a change in the controllingpower of the firm. Therefore, transaction multiples are higher than trading multiples.Depending on the market conditions for corporate transaction, this premiumcan go up to fifty percent.2.2 Empirical researchSimilar to the coverage in standard literature, the multiples approach is subjectof few academic studies. Most studies examine a limited set of firms or firm yearsand consider only a subset of multiples, mainly equity value multiples. Furthermore,methodological differences hinder comparisons across the studies.In any case, the following analysis of empirical findings gives a good overviewand helps me to better justify the contribution of my empirical study. I dividethe review into five subsections, each of them dealing with a specific aspect of themultiples valuation method and relating to the research questions for the empiricalpart.2.2.1 Valuation accuracy of the multiples valuation methodAlthough several studies present numbers for the valuation accuracy of themultiples valuation method, some of them are of special interest because they alsocompare the valuation accuracy of the multiples approach to fundamental equityvaluation models.Kaplan & Ruback (1995 and 1996) investigate properties of the DCF valuationmodel in the context of highly leveraged transactions such as LBOs and MBOs.While they conclude that DCF valuations approximate transaction values reasonablywell, they also find that simple enterprise value to earnings before interest,taxes, depreciation, and amortization (EV/EBITDA) multiples result in similarvaluation accuracy. The percentage of valuation errors within 15 percent of ob-