Multiples and Their Valuation Accuracy in European Equity Markets

Abstract

In spite of their widespread use in practice, accounting-based market multiples are subject of surprisingly few academic studies. As a contribution to close this gap, we examine the accuracy of different types of multiples in European equity markets. We find that multiples generally approximate market values reasonably well. In terms of relative accuracy, our results show: (1) Equity value multiples outperform entity value multiples. (2) Knowledge-related multiples are more accurate than traditional multiples. (3) Forward-looking multiples, in particular the two-year forward-looking price to earnings (P/E) multiple, outperform trailing multiples. These empirical findings are significant in magnitude, robust to the use of different performance measures, and constant over time. In an out-of-sample test using a U.S. dataset, our results for European data are confirmed. This supports the relevance of our findings for practical purposes.

Keywords: Finance and Accounting, Equity Valuation, Multiples

JEL Classification: G15, G24, M41