Market-to-Revenue Multiples in Public and Private Capital Markets

Abstract

The behavior and determinants of market to revenue ratios in public and private capital markets is examined. Three samples are analyzed : (1) all publicly traded stocks listed at some time on the NYSE/AMEX/NASDAQ in the 1980 to 2004 period, (2) sample of over 300 so-called “internet companies” in the 1996 to 2004 period, and (3) over 5,500 privately held venture capital backed companies in the 1992 to 2004 period. Both company size and the most recent revenue growth rate are found to explain significant variation across companies in their market to revenue multiples - smaller companies have higher multiples and companies with higher recent revenue growth rates have higher multiples. We also document how the capital market appears to use a broad based information set when setting market to revenue multiples for companies with negative revenue growth rates - transitory revenue growth components appear to be identified (in a probabilistic sense) by the capital market. Contrary to much anecdotal comment, we present evidence that the capital market behaved directionally along the lines predicted by capital market theory in the pricing of internet stocks in the 1996 to 2004 period.

Keywords: Market-to-Revenue Multiple, Price-to-Sales Ratio, Public Companies, Private Companies, Venture Capital, Internet Companies, Transitory Revenue

JEL Classification: G10, G12, G24, M13, M41