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From World Beta Posted by Mebane Faber

I usually don’t dip my toes into fundamental discussions here on World Beta, but this is a great paper, and I would be amiss to not repost it. Kudos to CXO for finding it…

Multiples and Their Valuation Accuracy in European Equity Markets

Abstract: In spite of their prevalent usage, accounting-based market multiples are subject of surprisingly few academic studies. To close this gap, this paper examines the valuation accuracy of different (types of) multiples in European equity markets. We find that multiples generally approximate market values reasonably well. In terms of relative performance, the results show that: (1) equity value multiples outperform entity value multiples; (2) knowledge-related multiples outperform traditional multiples; and (3) forward-looking multiples, in particular the two-year forward-looking price to earnings (P/E) multiple, outperform trailing multiples. Our results 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, we find similar results, which make our study directly relevant for practice.

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