Equity Valuation Using Multiples: An Empirical Investigation

Executive summaryThis book is motivated by the apparent gap between the widespread usage ofmultiples in valuation practice and the deficiency of relevant research related tomultiples. While valuing firms using multiples seems straightforward on the surface,it actually invokes several complications and open issues. To close this gap,the book examines the role of multiples in equity valuation and transforms the standardmultiples valuation method into a comprehensive framework for using multiplesin equity valuation.To identify the underlying drivers of different multiples, I derive intrinsic multiplesfrom fundamental equity valuation models. An overview of common marketmultiples and the standard multiples valuation method including its criticism initiatesan in-depth analysis of every single step of the four-step multiples valuationprocess. I investigate key criteria for the selection of value relevant measures andfor the identification of comparable firms, and assess the usefulness of a two-factormultiples valuation model combining book value and earnings multiples from atheoretical point of view.In the empirical study, I find that multiples generally approximate market valuesreasonably well. In terms of relative performance, the results show that: (1) equityvalue multiples outperform entity value multiples; (2) knowledge-related multiplesoutperform traditional multiples in science-based industries; and (3) forwardlookingmultiples, in particular the two-year forward-looking P/E multiple, outperformtrailing multiples. For the selection of comparable firms, the results suggestthe use of a preferably fine industry definition. While I find support for the generalperception that different industries are associated with different best multiplesamong trailing multiples, including forecast material reveals a clear dominance ofthe two-year forward-looking P/E multiple across industries. The results of theanalysis of the properties and valuation accuracy of the two-factor multiples valuationmodel provide evidence for the theoretical reasoning that the usefulness of incorporatingthe P/B multiple as a second decision relevant multiple into the twofactormodel depends on: (1) its valuation accuracy in a specific industry; and (2)the exclusiveness of information provided over the first decision relevant multiple.