Abstract
We study the accuracy of using traditional multiples valuation method in a global setting. The method of comparables refers to the valuation of companies based on multiples of comparable (similar) companies, preferably from same industry. While this may lead to accurate valuations of comparables from one country, it is often not the case for global comparables due to cross-country differences in culture, economics and accounting practice. We selected all listed non-financial companies with non-negative earnings and equity from the global ORBIS-database, i.e. 16,898 companies from 112 countries. PWC’s publication on contemporaneous adoption and use of IFRS, helped us categorise each country’s accounting regime as requiring, permitting or disallowing IFRS for listed companies. Hofstede’s cultural indexes adapted to Gray’s accounting values where used to categorise cultural differences. Finally, we chose the P/E, P/B, P/S, EV/S and EV/EBITDA ratios as our multiples. We find that the traditional focus on industry alone is not the best way to estimate a company’s value based on multiples. Different attitudes towards selection of comparables lead to differences in valuation precision due to differences in accounting tradition and culture in various countries. Consequently, the cultural aspect should be taken into consideration when choosing comparables across countries.
Highlights
Assume that all stocks are generally priced at their market value
We evaluate the five different multiples based on the ranking of their mean absolute prediction error (MAE) and extract four of the multiples and put them into the two most contrasting groups containing on the one hand the two most precise multiples, and on the other hand the two most imprecise multiples
That all negative multiples are disregarded becomes obvious when we look at the numbers in the table, since the descriptive statistics shows that all multiples are positively skewed, which can be seen in all cases, as the means are larger than the medians
Summary
Assume that all stocks are generally priced at their market value. A simple method of challenging the prices is the use of multiples from other companies in the industry (averages), from financial analysts’ reports as seen in market, or as described in many textbooks, since the intuition is that (almost) similar companies with regard to size, timing and uncertainty of expected future cash flows should be priced (almost) the same, having (almost) identical multiples, like P/E, P/B, etc. Since our starting point is a global perspective, we introduce a country based economic competitiveness factor (WEF in [30]) as a means for a further and relevant specification for Total Assets and Return on Equity, and we add the following two peer group selection prescriptions:. Where the peer group selection procedure “ROE + Total Assets” was the best one for the Earnings-to-Price multiple, this procedure is worse than “Market” for all significance levels above 0.00703 for the EBITDA-to-Enterprise Value multiple This clearly indicates that large differences exist across different multiples, and from Panel A there seems to be a clear difference in the mean absolute precision error sizes for the unlevered multiples compared to the levered multiples. Evaluation of multiples for Total Assets and Return on Equity based comparables company peer group selection versus other multiples
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