Abstract
AbstractWe examine how the accuracy of a multiples‐based valuation changes as the number of comparable firms used to estimate the valuation multiple increases. Our research is motivated by a contrast between the approach followed by practitioners, who typically use a small number of closely comparable firms, and the academic literature which often uses all firms in an industry. Using a simple selection rule based on growth rates, we find that using 10 closely comparable firms is as accurate on average as using the entire cross‐section of firms in an industry. The loss of accuracy from using five comparable firms rather than 10 firms or the entire industry is not great.
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