New Evidence on the Relation Between the Enterprise Multiple and Average Stock Returns
University of Notre Dame
Jay W. Wellman
Cornell University School of Hotel Administration
September 5, 2010
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
Date posted: October 1, 2009 ; Last revised: September 7, 2010
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