The Valuation by Multiples of Italian Firms
AbstractThe 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Macerata University, Department of Studies on Economic Development (DiSSE) in its series Working Papers with number 14-2008.
Date of creation: May 2008
Date of revision: Nov 2008
Comparables; Equity valuation; Multiples; Firm valuation;
Find related papers by JEL classification:
- O1 - Economic Development, Technological Change, and Growth - - Economic Development
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994.
" Contrarian Investment, Extrapolation, and Risk,"
Journal of Finance,
American Finance Association, vol. 49(5), pages 1541-78, December.
- 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.
- Josef Lakonishok & Robert W. Vishny & Andrei Shleifer, 1993. "Contrarian Investment, Extrapolation, and Risk," NBER Working Papers 4360, National Bureau of Economic Research, Inc.
- 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.
- 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.
- 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.
- Jing Liu, 2002. "Equity Valuation Using Multiples," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 135-172, 03.
- Kaplan, Steven N & Ruback, Richard S, 1995.
" The Valuation of Cash Flow Forecasts: An Empirical Analysis,"
Journal of Finance,
American Finance Association, vol. 50(4), pages 1059-93, September.
- 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.
- Deloof M. & De Maeseneire W. & Inghelbrecht K., 2002. "The valuation of IPOs by investment banks and the stock market: empirical evidence," Working Papers 2002004, University of Antwerp, Faculty of Applied Economics.
- 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.
- 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.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Carlo Sampaoli).
If references are entirely missing, you can add them using this form.