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Selecting Comparables for the Valuation of European Firms

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  • Ingolf Dittmann
  • Christian Weiner

Abstract

This paper investigates which comparables selection method generates the most precise forecasts when valuing European companies with the enterprise value to EBIT multiple. We also consider the USA as a reference point. It turns out that selecting comparable companies with similar return on assets clearly outperforms selections according to industry membership or total assets. Moreover, we investigate whether comparables should be selected from the same country, from the same region, or from all OECD members. For most European countries, choosing comparables from the 15 European Union member states yields the best forecasts. In contrast, for the UK and the US, comparables should be chosen from the same country only.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2005-002.

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Length: 27 pages
Date of creation: Feb 2005
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2005-002

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Keywords: comparables; selection method; valuing companies; forecasts; EBIT; industry membership; ROA;

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References

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  1. Jing Liu, 2002. "Equity Valuation Using Multiples," Journal of Accounting Research, Wiley Blackwell, Wiley Blackwell, vol. 40(1), pages 135-172, 03.
  2. Kaplan, Steven N & Ruback, Richard S, 1995. " The Valuation of Cash Flow Forecasts: An Empirical Analysis," Journal of Finance, American Finance Association, American Finance Association, vol. 50(4), pages 1059-93, September.
  3. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, Elsevier, vol. 60(2-3), pages 187-243, May.
  4. Kim, Moonchul & Ritter, Jay R., 1999. "Valuing IPOs," Journal of Financial Economics, Elsevier, Elsevier, vol. 53(3), pages 409-437, September.
  5. Sophie Manigart & Koen De Waele* & Mike Wright & Ken Robbie & Philippe Desbrières & Harry Sapienza & Amy Beekman, 2000. "Venture capitalists, investment appraisal and accounting information: a comparative study of the USA, UK, France, Belgium and Holland," European Financial Management, European Financial Management Association, European Financial Management Association, vol. 6(3), pages 389-403.
  6. Ingolf Dittmann & Ernst Maug & Johannes Kemper, 2004. "How Fundamental are Fundamental Values? Valuation Methods and their Impact on the Performance of German Venture Capitalists," European Financial Management, European Financial Management Association, European Financial Management Association, vol. 10(4), pages 609-638.
  7. Sanjeev Bhojraj, 2002. "Who Is My Peer? A Valuation-Based Approach to the Selection of Comparable Firms," Journal of Accounting Research, Wiley Blackwell, Wiley Blackwell, vol. 40(2), pages 407-439, 05.
  8. Cheng, C S Agnes & McNamara, Ray, 2000. " The Valuation Accuracy of the Price-Earnings and Price-Book Benchmark Valuation Methods," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 15(4), pages 349-70, December.
  9. Volker Herrmann & Frank Richter, 2003. "Pricing With Performance-Controlled Multiples," Schmalenbach Business Review (sbr), LMU Munich School of Management, LMU Munich School of Management, vol. 55(3), pages 194–219, July.
  10. Gilson, Stuart C & Hotchkiss, Edith S & Ruback, Richard S, 2000. "Valuation of Bankrupt Firms," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 13(1), pages 43-74.
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Citations

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Cited by:
  1. Sigbert Klinke & Uwe Ziegenhagen & Yuval Guri, 2005. "Yxilon – a Modular Open-Source Statistical Programming Language," SFB 649 Discussion Papers, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany SFB649DP2005-018, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Dragos Ioan Mînjina, 2009. "Relative Performance of Valuation Using Multiples. Empirical Evidence on Bucharest Stock Exchange," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 1(1), pages 035-053, December.
  3. Barbara Fidanza, 2008. "The Valuation by Multiples of Italian Firms," Working Papers, Macerata University, Department of Studies on Economic Development (DiSSE) 14-2008, Macerata University, Department of Studies on Economic Development (DiSSE), revised Nov 2008.
  4. Juhász Jácint & Kovács Imola & Kovács Ildikó, 2010. "Comparable Valuation Method - A New Approach. Case Study: A Romanian Flexographic Printing Firm," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 571-577, December.

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