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

43 Pages Posted: 1 Oct 2009 Last revised: 7 Sep 2010

Tim Loughran

University of Notre Dame

Jay W. Wellman

Cornell University - School of Hotel Administration

Date Written: 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.

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

JEL Classification: G12, G14

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

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 )

435B Statler Hall
Ithaca, NY 14853-6902
United States

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