A Factor Model of Company Relative Valuation

63 Pages Posted: 19 Feb 2021

See all articles by Xiaolu Hu

Xiaolu Hu

RMIT University - School of Economics, Finance and Marketing

Malick O. Sy

RMIT University - School of Economics, Finance and Marketing; Financial Research Network (FIRN)

Liuren Wu

City University of New York, CUNY Baruch College - Zicklin School of Business

Date Written: October 7, 2020

Abstract

Accurate company valuation is the starting point of value investing and corporate decisions. This paper proposes a statistical factor model to generate company valuation comparison across a large universe. The model scales the market value of a company by its book capital to generate a cross-sectionally comparable relative value target, constructs valuation factors by combining several descriptors from a similar category to increase coverage and reduce multicollinearity, and links industry classification and the valuation factors to the company relative value via a cross-sectional contemporaneous regression at each date. Historical analysis on U.S. publicly traded companies shows that the factor model explains a large proportion of the cross-sectional variation of company relative value and experiences little out-of-sample degeneration. The regression residual represents temporary company misvaluation, and can be exploited by both outside investors as attractive investment opportunities and internal management for market timing of corporate decisions.

Keywords: Company valuation; factor model; valuation factors; relative value ratio; market pricing of valuation factors; value investing; factor returns; market timing of financing decisions

JEL Classification: C51, G11, G12, G30

Suggested Citation

Hu, Xiaolu and Sy, Malick O. and Wu, Liuren, A Factor Model of Company Relative Valuation (October 7, 2020). Available at SSRN: https://ssrn.com/abstract=3706995 or http://dx.doi.org/10.2139/ssrn.3706995

Xiaolu Hu

RMIT University - School of Economics, Finance and Marketing ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria 3000
Australia

Malick O. Sy

RMIT University - School of Economics, Finance and Marketing ( email )

445 Swanson Street Building 80 level 8 Room 58
Melbourne, Victoria 3000
Australia
+61399255895 (Phone)
+61399255986 (Fax)

HOME PAGE: http://www.rmit.edu.au

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Liuren Wu (Contact Author)

City University of New York, CUNY Baruch College - Zicklin School of Business ( email )

One Bernard Baruch Way
Box B10-247
New York, NY 10010
United States
646-312-3509 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://faculty.baruch.cuny.edu/lwu/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
91
Abstract Views
430
rank
331,025
PlumX Metrics