Is There a Limit to the Accuracy of Equity Valuation Using Multiples?

44 Pages Posted: 10 Jul 2013 Last revised: 23 Jun 2016

See all articles by Ian A. Cooper

Ian A. Cooper

London Business School

Neophytos Lambertides

Cyprus University of Technology

Date Written: January 11, 2014

Abstract

We investigate the reasons for there being an apparent limit to the accuracy of valuation using multiples, when it is implemented in a standard way. We find that most of the error comes from failing to correct known biases in earnings forecasts. Another part comes from mismatching observable characteristics of target firms but the only characteristic that matters is growth. A smaller part comes from mismatching unobservable but persistent characteristics of the target firm. We develop a procedure to eliminate these errors, which reduces the variance of valuation errors by more than 60%. The remaining error is mainly random noise.

Keywords: Equity Valuation, Valuation, Multiples Valuation

JEL Classification: G11, G24, D81

Suggested Citation

Cooper, Ian Anthony and Lambertides, Neophytos, Is There a Limit to the Accuracy of Equity Valuation Using Multiples? (January 11, 2014). Available at SSRN: https://ssrn.com/abstract=2291869 or http://dx.doi.org/10.2139/ssrn.2291869

Ian Anthony Cooper (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 171 262 5050 (Phone)

Neophytos Lambertides

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

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