Selecting Comparables for the Valuation of European Firms

Abstract

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. JEL Classification Codes: G19, M41# We would like to thank Ernst Maug and Niels Ulbricht for helpful discussions and comments. We gratefully acknowledge financial support by the Rudolf von Bennigsen-Foerder foundation and by the Deutsche Forschungsgemeinschaft through the SFB 649 "Economic Risk".

An Optimal Peer Group Selection Strategy for Multiples-Based Modelling in the South African Equity Market

“…The construction of multiples based on a target company's industry classification is a common phenomenon (Nel et al, 2013a;Nel, 2009a;2009b;Goedhart et al, 2005;Liu, Nissim and Thomas, 2002a;Fernández, 2001;Barker, 1999). So, too, is a multiples-based valuation approach where peer groups are based on valuation fundamentals (Henschke and Homburg, 2009;Dittmann and Weiner, 2005;Goedhart et al, 2005;Herrmann and Richter, 2003;Bhojraj and Lee, 2002). The methodology applied in this paper is largely adopted from Nel et al (2013a, b).…”

“…The premise of the proponents of industry classification as a basis for peer group selection is that companies operating in similar industries will have similar profitability, growth and risk profiles. The second school of thought argues that peer group selection should be based on companies with similar valuation fundamentals (Dittmann and Weiner, 2005;Goedhart, Koller and Wessels, 2005). The premise of the proponents of valuation fundamentals as a basis for peer group selection is that companies with similarly sized economic variables will have similar profitability, growth and risk profiles.…”

“…Initial research findings published in the developed market literature by Alford (1992) suggested that peer group selection based on valuation fundamentals failed to result in an increase in valuation precision vis-à-vis peer group selection based on industry classification. However, subsequent studies by Henschke and Homburg (2009); Dittmann and Weiner (2005); Goedhart et al (2005); Herrmann and Richter (2003); Bhojraj and Lee (2002) and Cheng and McNamara (2000) found that peer group selection based on valuation fundamentals offered substantial improvements in valuation precision over peer group selection based on industry classifications. Although the evidence, therefore, suggests that multiples whose peer group selection is based on valuation fundamentals offers superior explanatory power vis-àvis multiples whose peer group selection is based on industry classification, these findings emanate from studies that focused on the relatively deeply traded and liquid markets of developed countries.…”

Multiples for Valuation Estimates of Companies in the Technology Sector of Emerging Markets

“…Among them, Cheng & McNamara (2000) reported that the use of earnings per share -the relevant criterion for selecting the appropriate P/E and P/BV multiples. Dittmann and Weiner (2005) recommend the use of return of assets (ROA) as a selection criterion for the EV/EBIT multiples in the similar study. Penman & Zhang (2006) analyzed the effect of sustainable earnings on the P/E multiple.…”

Avaliação de empresas por múltiplos aplicado ao mercado brasileiro

“…Se, por um lado, o analista perde os benefícios de uma análise mais completa e complexa, proporcionada pelo método do FDC, por outro há a conveniência de obter uma avaliação com resultados satisfatórios sem incorrer em grandes esforços em termos de custos e tempo (Bhojraj & Lee, 2002). Além disso, é possível avaliar mais de uma empresa ao mesmo tempo e, nesse sentido, sua popularidade é atribuída à simplicidade, se comparada a outros métodos (Dittmann &Weiner 2005).…”