Download this Paper Open PDF in Browser

Why Do Enterprise Multiples Predict Expected Stock Returns?

30 Pages Posted: 5 Oct 2016 Last revised: 4 May 2017

Steve Crawford

University of Houston

Wesley R. Gray

Alpha Architect; Drexel University - LeBow College of Business

Jack Vogel

Alpha Architect; Villanova University

Yang Xu

Alpha Architect

Date Written: April 21, 2017

Abstract

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

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

Steve Crawford

University of Houston ( email )

Houston, TX 77204
United States

Wesley R. Gray (Contact Author)

Alpha Architect ( email )

213 Foxcroft Road
Broomall, PA 19008
United States
7732304727 (Phone)

HOME PAGE: http://www.alphaarchitect.com

Drexel University - LeBow College of Business ( email )

3141 Chestnut St
Philadelphia, PA 19104
United States

HOME PAGE: http://www.lebow.drexel.edu/corporate-services/corporate-and-executive-education/executive-faculty

Jack Vogel

Alpha Architect ( email )

213 Foxcroft Road
Broomall, PA 19008
United States
215-882-9983 (Phone)

HOME PAGE: http://alphaarchitect.com/

Villanova University ( email )

Villanova, PA 19085
United States

Yang Xu

Alpha Architect ( email )

213 Foxcroft Road
Broomall, PA 19008
United States

Paper statistics

Downloads
959
Rank
18,602
Abstract Views
3,886