Equity Valuation Using Multiples

51 Pages Posted: 18 Oct 2000

See all articles by Jing Liu

Jing Liu

The Cheung Kong Graduate School of Business

Doron Nissim

Columbia University - Columbia Business School

Jacob K. Thomas

Yale School of Management

Date Written: August 2000


We examine the valuation performance of a comprehensive list of pricing multiples. We find that multiples derived from forward earnings explain stock prices remarkably well for most firms: pricing errors are within 15 percent of stock prices for about half of our sample. In terms of relative performance, the following general rankings are observed: 1) forward earnings measures, 2) historical earnings measures, 3) cash flow measures and book value of equity (tied), and 4) sales. Contrary to the popular view that different industries have different ?best? multiples, we find that these overall rankings are observed consistently for almost all industries examined. Adjusting the ratio formulation typically followed in practice to allow for an intercept offers some improvement, especially for multiples that perform poorly. No improvement is observed, however, when we consider more complex measures of intrinsic value based on short-cut residual income models (where forward earnings are combined with book values, estimated discount rates, and generic terminal value estimates).

JEL Classification: G12, M41

Suggested Citation

Liu, Jing and Nissim, Doron and Thomas, Jacob, Equity Valuation Using Multiples (August 2000). Available at SSRN: https://ssrn.com/abstract=241266 or http://dx.doi.org/10.2139/ssrn.241266

Jing Liu

The Cheung Kong Graduate School of Business ( email )

1 East Changan Avenue, Oriental Plaza

Doron Nissim

Columbia University - Columbia Business School ( email )

United States
212-854-4249 (Phone)

Jacob Thomas (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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