Triangulating the Accuracy of Comparable Company Valuations: A Multidimensional Analysis Considering Interaction Effects
43 Pages Posted: 27 Nov 2013
Date Written: December 23, 2011
Comparable valuation is one of the most widespread valuation techniques in practice. In order to compute a representative comparable for a peer group, three decisions need to be made. A value indicator, a time horizon for the value, and a compression method to aggregate all comparables of a peer group into a single industry comparable must be determined. The research on this topic has tried to identify the most accurate specification for each of these three dimensions separately to estimate the market value of equity. However, we find that interaction effects between these three dimensions are present. Therefore, combining the most accurate specification of each dimension leads to inferior results. As a basis of comparison, our study first replicates and thereby largely confirms the results of previous research with a single homogeneous sample. More interestingly, two-dimensional and multidimensional analyses show that quite influential interaction effects take place between the value indicator (e.g., sales or EBIT) and the compression method (e.g., arithmetic mean or median). In order to measure the effect of the three dimensions on valuation accuracy and to incorporate the interaction effects, repeated-measures ANOVAs are conducted. This analysis reveals the highest impact among the choices for the value indicator. The second-highest effect cannot be attributed to another of the three "original" dimensions, but to the interaction effect of the value indicator and compression methods, followed by the single impact of the compression dimension. The third "original" dimension, the time horizon, does not contribute significantly to valuation accuracy in the overall ANOVA.
Keywords: Valuation accuracy, comparables, multiples
JEL Classification: G34, G17, M41, C52
Suggested Citation: Suggested Citation