Does Consistency Improve Multiple Quality? – The German Case

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 6,000 firm years from German firms we find consistent multiple definitions generally to outperform 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 vast majority of cases consistent definitions still outperform inconsistent ones. We find that consistent treatment of financial leases, pensions, preferred stocks and minority interest generally increases the valuation accuracy. However for two balance sheet variables we find mixed evidence: For accounts payables, 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, we also get opaque results with respect to consistency. Within the class of consistently defined multiples EBITDA multiples have the highest valuation performance followed by EBIT, net income and sales based multiples.