Equity Valuation Using Multiples: An Empirical Investigation

Literature review 19In sum, the last two studies suggest that the GICS and the ICB system, bothproprietary but frequently used by analysts and investment bankers, provide superiorindustry classifications for fundamental analysis and valuation studies whichcall for industry based control samples. Given these results, academics working insuch an area should try to gain access to either GICS or ICB industry codes for theirresearch projects.2.2.4 Industry-preferred multiplesAlthough common in practice, empirical research offers limited evidence onthe existence of industry-preferred multiples. Tasker (1998) looks at patterns of howpractitioners estimate the value of acquisitions in their fairness opinions and researchreports. She finds a systematic use of industry-preferred multiples, which sheascribes to variations in the effectiveness of accounting standards across industries.This explanation is consistent with different multiples being more appropriate indifferent industries.Barker (1999a) presents survey results, derived from both questionnaire andinterview research, on the existence of industry-preferred multiples. For instance,both Tasker (1998) and Barker (1999a) find that practitioners prefer using P/B andP/E multiples in the financial industry, price to operating cash flow (P/OCF) multiplesin the consumer services industry, or P/D multiples in the utilities industry.These studies, however, do not represent evidence that the industry-preferred multiplesused in practice are also those multiples with the highest valuation accuracy inspecific industries. In his master thesis, von Berenberg-Consbruch (2006) makes afirst step in this direction and reports empirical results for several European key industries,which are in line with the findings of this book.2.2.5 Combination of multiplesThe combination of book value and earnings multiples into a two-factor multiplesvaluation model is a generally unexplored area. Cheng and McNamara (2000)investigate the valuation accuracy of P/E and P/B multiples, and a combination ofboth using equal weights. For the U.S. equity market, the combined P/E-P/B modelperforms better than either P/E or P/B multiples alone, which implies that both earningsand book values are value relevant; that is, one does not substitute perfectly for