Abstract

http://ssrn.com/abstract=1481279
 
 

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New Evidence on the Relation Between the Enterprise Multiple and Average Stock Returns


Tim Loughran


University of Notre Dame

Jay W. Wellman


Cornell University School of Hotel Administration

September 5, 2010


Abstract:     
Practitioners increasingly use the enterprise multiple as a valuation measure. The enterprise multiple is (equity value debt preferred stock – cash)/ (EBITDA). We document that the enterprise multiple is a strong determinant of stock returns. Following Fama and French (1993) and Chen, Novy-Marx, and Zhang (2010), we create an enterprise multiple factor that generates a return premium of 5.28% per year. We interpret the enterprise multiple as a proxy for the discount rate. Firms with low enterprise multiple values appear to have higher discount rates and higher subsequent stock returns than firms with high enterprise multiple values.

Number of Pages in PDF File: 43

Keywords: Enterprise Multiple, Fama French factors, book-to-market

JEL Classification: G12, G14

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Date posted: October 1, 2009 ; Last revised: September 7, 2010

Suggested Citation

Loughran, Tim and Wellman, Jay W., New Evidence on the Relation Between the Enterprise Multiple and Average Stock Returns (September 5, 2010). Available at SSRN: http://ssrn.com/abstract=1481279 or http://dx.doi.org/10.2139/ssrn.1481279

Contact Information

Tim Loughran (Contact Author)
University of Notre Dame ( email )
Department of Finance
245 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-8432 (Phone)
574-631-5255 (Fax)
Jay W. Wellman
Cornell University School of Hotel Administration ( email )
Ithaca, NY 14853
United States
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