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P/E and P/B multiples and company’s financial structure

Author

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  • Dragos Minjina

    (Faculty of Insurance, Finance, Banking and Stock Exchanges, Academy of Economic Studies, Bucharest)

Abstract

Multiples play an important role in valuation. P/E and P/B multiples are in negative relation with the cost of equity, which in turn is influenced by risk and interest rate. The P/E multiple is mainly driven by future earnings growth, whereas the major drivers of the P/B multiple are future return on common equity (ROCE) and growth in book value of equity. For P/E multiple is also important the return on invested capital (ROIC). In the real world, financing decisions lead to the modification of both equity valuation multiples and entity valuation multiples. In spite of the fact that the former multiples category is theoretically more affected, the empirical studies reveal a greater performance of the valuations based on these multiples. The relation between market-to-book ratio and leverage ratio is not monotonic and is positive for most firms.

Suggested Citation

  • Dragos Minjina, 2008. "P/E and P/B multiples and company’s financial structure," Analele Stiintifice ale Universitatii "Alexandru Ioan Cuza" din Iasi - Stiinte Economice (1954-2015), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 55, pages 103-110, November.
    • Handle: RePEc:aic:journl:y:2008:v:55:p:103-110
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    References listed on IDEAS

    as
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    3. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, February.
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