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The Valuation by Multiples of Italian Firms


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  • Barbara Fidanza

    (Università di Macerata)

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    The purpose of this paper is twofold. Firstly, to test a sample of companies listed on the Milan stock exchange from 2000 to 2006, which comparables selection method generates the most precise forecasts when appraising with price/earnings, price/book value, price/sales, enterprise value/EBIT and enterprise value/FCF multiples. Comparables firms are selected by activity sector, sector and size, sector and ROA, ROA and size and averaging with the arithmetic mean, median and harmonic mean, therefore twelve multiple valuation methods are analyzed. The empirical results suggest that valuation with a selection of comparables firms on the basis of sector and ROA or sector and size is more accurate; moreover, valuation improves when multiples are averaged using median relative to arithmetic and harmonic mean. Secondly, to test the effectiveness of the main multiples (price/earnings, price/book value, price/sales, enterprise value/sales, enterprise value/book value, enterprise value/EBIT, enterprise value/EBITDA, enterprise value/free cash flow) in determining company value. We also analyze how factors such as sector, size and year bias these outcomes. The results show that the multiples based on cash flows are almost always significant; the multiples based on earnings are more significant in industrial sectors and in particular for small firms and with many intangible assets; the multiples on book value appear more effective for non-industrial firms.

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    Paper provided by Macerata University, Department of Studies on Economic Development (DiSSE) in its series Working Papers with number 14-2008.

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    Date of creation: May 2008
    Date of revision: Nov 2008
    Handle: RePEc:mcr:wpaper:wpaper00014

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    Keywords: Comparables; Equity valuation; Multiples; Firm valuation;

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    1. Steven N. Kaplan & Richard S. Ruback, 1994. "The Valuation of Cash Flow Forecasts: An Empirical Analysis," NBER Working Papers 4724, National Bureau of Economic Research, Inc.
    2. DeFond, Mark L. & Hung, Mingyi, 2003. "An empirical analysis of analysts' cash flow forecasts," Journal of Accounting and Economics, Elsevier, vol. 35(1), pages 73-100, April.
    3. Ingolf Dittmann & Christian Weiner, 2005. "Selecting Comparables for the Valuation of European Firms," SFB 649 Discussion Papers SFB649DP2005-002, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    4. Hotchkiss, Edith S. & Mooradian, Robert M., 1998. "Acquisitions as a Means of Restructuring Firms in Chapter 11," Journal of Financial Intermediation, Elsevier, vol. 7(3), pages 240-262, July.
    5. Josef Lakonishok & Andrei Shleifer & Robert W. Vishny, 1993. "Contrarian Investment, Extrapolation, and Risk," University of Chicago - George G. Stigler Center for Study of Economy and State 84, Chicago - Center for Study of Economy and State.
    6. Richard G. Sloan, 2002. "Discussion of Who Is My Peer? A Valuation-Based Approach to the Selection of Comparable Firms," Journal of Accounting Research, Wiley Blackwell, vol. 40(2), pages 441-444, 05.
    7. DELOOF, Marc & DE MAESENEIRE, Wouter & INGHELBRECHT, Koen, 2002. "The valuation of IPOs by investment banks and the stock market: Empirical evidence," Working Papers 2002004, University of Antwerp, Faculty of Applied Economics.
    8. Gilson, Stuart C & Hotchkiss, Edith S & Ruback, Richard S, 2000. "Valuation of Bankrupt Firms," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 43-74.
    9. Meitner, Matthias, 2003. "Option-Style Multi-Factor Comparable Company Valuation for Practical Use," ZEW Discussion Papers 03-76, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    10. Ballas, Apostolos A. & Hevas, Dimosthenis L., 2005. "Differences in the valuation of earnings and book value: Regulation effects or industry effects?," The International Journal of Accounting, Elsevier, vol. 40(4), pages 363-389.
    11. Jing Liu, 2002. "Equity Valuation Using Multiples," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 135-172, 03.
    12. Aggarwal, Raj & Hiraki, Takato & Rao, Ramesh P, 1992. "Price/Book Value Ratios and Equity Returns on the Tokyo Stock Exchange: Empirical Evidence of an Anomalous Regularity," The Financial Review, Eastern Finance Association, vol. 27(4), pages 589-605, November.
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