Does consistency improve accuracy in multiple—based valuation?

Abstract

In this paper we analyze the impact of consistency upon the accuracy of corporate values estimates provided by multiple-based valuation methods. Based on a sample with more than 6000 firm years from German firms we find consistent multiple definitions outperform in most cases inconsistent ones. The first layer consistency requirement of properly matching entity figures and equity figures increases the valuation accuracy in all cases. In a deeper analysis with respect to consistent enterprise value definitions, in the majority of cases consistent definitions still outperform inconsistent ones. We find that consistent treatment of financial leases, pensions and minority interest generally increases the valuation accuracy. However for balance sheet variable accounts payables we find mixed evidence: the inclusion results in a higher valuation accuracy for all enterprise value multiples, whereas under our hypothesis it should only do so for the EV/sales multiplier. For investments in associates and joint ventures, an inconsistent treatment also results in a higher valuation accuracy. Within the class of consistently defined multiples EBITDA multiples have the highest valuation performance followed by EBIT, net income and sales based multiples.