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Option-Style Multi-Factor Comparable Company Valuation for Practical Use

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  • Meitner, Matthias
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    Abstract

    Classical single-factor comparable company valuation (CCV) like e.g. valuation using the price-earnings ratio is associated with several shortcomings. The two most important are the non-applicability of negative values in the basis of reference and the high requirements to the qualitative characteristics of comparable companies. This paper develops a multi-factor CCV model based on substance and performance related accounting attributes that largely overcomes these drawbacks. Additionally, the model allows to depict expected future earnings development economically sounder than single-factor models. Furthermore, by accounting for management?s option to adapt firm assets differently or to liquidate the company the model can conclusively assign positive stock prices to currently negatively performing companies. --

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    Bibliographic Info

    Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 03-76.

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    Date of creation: 2003
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    Handle: RePEc:zbw:zewdip:1686

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    Keywords: Valuation; Multiples; Real Options;

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    1. Louis K. C. Chan & Jason Karceski & Josef Lakonishok, 2003. "The Level and Persistence of Growth Rates," Journal of Finance, American Finance Association, vol. 58(2), pages 643-684, 04.
    2. Ariel, Robert, 1998. "Risk Adjusted Discount Rates and the Present Value of Risky Costs," The Financial Review, Eastern Finance Association, vol. 33(1), pages 17-30, February.
    3. Zhang, Xiao-Jun, 2000. "Conservative accounting and equity valuation," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 125-149, February.
    4. Holthausen, Robert W. & Watts, Ross L., 2001. "The relevance of the value-relevance literature for financial accounting standard setting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 3-75, September.
    5. Jing Liu, 2002. "Equity Valuation Using Multiples," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 135-172, 03.
    6. Myron J. Gordon & Eli Shapiro, 1956. "Capital Equipment Analysis: The Required Rate of Profit," Management Science, INFORMS, vol. 3(1), pages 102-110, October.
    7. Fernández, Pablo, 2002. "Valuation using multiples. How do analysts reach their conclusions?," IESE Research Papers D/450, IESE Business School.
    8. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 1998. "Relative valuation roles of equity book value and net income as a function of financial health," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 1-34, February.
    9. Booth, Laurence D., 1982. "Correct Procedures for the Evaluation of Risky Cash Outflows," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(02), pages 287-300, June.
    10. Berger, Philip G. & Ofek, Eli & Swary, Itzhak, 1996. "Investor valuation of the abandonment option," Journal of Financial Economics, Elsevier, vol. 42(2), pages 257-287, October.
    11. Merton H. Miller, 1994. "Is American Corporate Governance Fatally Flawed?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(4), pages 32-39.
    12. 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, vol. 15(4), pages 349-70, December.
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    Cited by:
    1. Barbara Fidanza, 2008. "The Valuation by Multiples of Italian Firms," Working Papers 14-2008, Macerata University, Department of Studies on Economic Development (DiSSE), revised Nov 2008.

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