30 Pages Posted: 5 Oct 2016 Last revised: 4 May 2017
Date Written: April 21, 2017
The enterprise multiple (EM) effect has been documented across global stock markets. EM is a robust predictor of expected average returns and generates a stronger value effect than traditional value metrics. We find evidence the EM effect is primarily attributable to mispricing and cannot be explained by higher systematic risk. We document that earnings announcement returns, forecast errors, and forecast revisions all support the notion that the EM effect is driven by mispricing associated with predictable investor expectation errors. Finally, we show that the EM effect is stronger during times of strong market sentiment, which also supports the mispricing-based hypothesis.
Keywords: Value Investing, Value Anomaly, Enterprise Multiples, Abnormal Returns, Market Efficiency
JEL Classification: G10, G11, G14
Suggested Citation: Suggested Citation
Crawford, Steve and Gray, Wesley R. and Vogel, Jack and Xu, Yang, Why Do Enterprise Multiples Predict Expected Stock Returns? (April 21, 2017). Available at SSRN: https://ssrn.com/abstract=2847874