P/E-ratios in Relative Valuation - a Mission Impossible?
AbstractRelative P/E-ratio valuation apparently still plays an important role among investment research analysts and advisors (cf. Goldman Sachs,1999). In a valuation model of this kind, the value of owners´equity is typically calculated as a function of an observed P/E-ratio for some peer company, or the mean/median P/E-ratio for some group of peer companies. The research question being addressed in the paper is concerned with the validity of a benchmark P/E-ratio being assessed in this way. Assuming that there is only one peer company, the importance of differences (between the company being valued and its peer company) with regard to the book return on owners´equity and the growth of owners´equity have been investigated. In the main, it is shown that relative P/E-ratio valuation will not be able to handle differences in the expected book return or growth of owners´equity. In an empirical context, however, controlling for industry and the expected book return for next year, together with some modification of the valuation model itself, can improve the quality of earnings-based relative valuation.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Business Administration with number 2001:7.
Length: 29 pages
Date of creation: 30 Apr 2001
Date of revision:
Publication status: Published in Investment Management and Financial Innovations, 2008, pages 237-248.
Contact details of provider:
Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, SE 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
Web page: http://www.hhs.se/
More information through EDIRC
equity valuation; financial statement analysis; P/E-ratio; relative valuation; valuation modelling;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Helena Lundin).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.