Market and Transaction Multiples’ Accuracy in the European Equity Market

Abstract

In spite of their widespread use in practice, accounting-based multiples are subject of few academic studies. This paper investigates market and transaction multiples’ accuracy in corporate equity valuation by considering a sample of listed companies which are assumed to be private and evaluated according to accounting-based multiples. Since equity valuation is particularly challenging under stressed conditions, it focuses on the core period of the recent financial crisis. Results show that transaction and market multiples perform very poorly at least during financial turmoil, i.e. under the most uncertain information condition, and those relevant firm specific adjustments are necessary. Specifically, equity valuation based on multiples entails measurement errors which tend to overestimate fundamental values and to lead to more results that are volatile.

Keywords: Corporate Valuation, Market Multiples, Transaction Multiples, Financial Reporting

JEL Classification: G30, M40