Pricing with Performance-Controlled Multiples

University Witten/Herdecke Working Paper No. 91

Posted: 13 Aug 2002

See all articles by Frank Richter

Frank Richter

Goldman, Sachs & Co. oHG; University of Witten/Herdecke - Institute for Mergers and Acquisitions

Volker Herrmann

McKinsey & Company, Inc.

Multiple version iconThere are 2 versions of this paper

Date Written: February 2002


This study presents and tests an approach for the pricing of equity investments, using multiples from comparable assets that are traded and priced in the market already. The innovative aspect of this approach is that we use key performance indicators ("kpi") to select assets for the set of comparables. We identify the kpi on the basis of a simplified valuation model. The idea of selecting companies based on kpi is employed earlier. However, in contrast to the earlier work, we avoid using multiple regressions to aggregate the kpi because the prerequisites for this statistical approach are not fulfilled. We investigate the accuracy of our approach vis-a-vis other approaches using a multi-year sample of American and European firms. The empirical results strongly suggest that a selection of comparable assets based on kpi - especially expected earnings growth rates and rates of return on capital - is superior to a selection based on SIC industry codes. Furthermore, the additional control of industry membership after controlling for kpi does not significantly increase accuracy. Findings are robust against variations of the basis of reference, the country of origin, the relevant industry as well as the year under observation. Additionally, the study offers some guidance with respect to the reliability of different bases of reference as well as diverse methods of estimating multiples from comparable sets.

Keywords: Asset Pricing, Multiples, Discounted Cash-Flow, Key Performance Indicators

JEL Classification: G32, G12

Suggested Citation

Richter, Frank and Herrmann, Volker, Pricing with Performance-Controlled Multiples (February 2002). University Witten/Herdecke Working Paper No. 91, Available at SSRN:

Frank Richter (Contact Author)

Goldman, Sachs & Co. oHG ( email )

Friedrich-Ebert-Anlage 49
Frankfurt am Main, 60308
+49 69 7532 2580 (Phone)
+49 69 7532 2800 (Fax)

University of Witten/Herdecke - Institute for Mergers and Acquisitions ( email )

Alfred-Herrhausen-Strasse 50
58448 Witten
+49 69 7532 2580 (Phone)

Volker Herrmann

McKinsey & Company, Inc. ( email )

Magnusstrasse 11
D-50672 Koeln
+49 221 208 7298 (Phone)
+49 221 208 7299 (Fax)

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