43 Pages Posted: 1 Oct 2009 Last revised: 7 Sep 2010
Date Written: 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.
Keywords: Enterprise Multiple, Fama French factors, book-to-market
JEL Classification: G12, G14
Suggested Citation: 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: https://ssrn.com/abstract=1481279 or http://dx.doi.org/10.2139/ssrn.1481279
By Lu Zhang