Journal Article10.2139/SSRN.241266
Equity Valuation Using Multiples
TL;DR: In this article, the authors examine the performance of a comprehensive list of pricing multiples and find that multiples derived from forward earnings explain stock prices remarkably well for most firms: pricing errors are within 15 percent of stock prices for about half of the sample.
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Abstract: We examine the valuation performance of a comprehensive list of pricing multiples. We find that multiples derived from forward earnings explain stock prices remarkably well for most firms: pricing errors are within 15 percent of stock prices for about half of our sample. In terms of relative performance, the following general rankings are observed: 1) forward earnings measures, 2) historical earnings measures, 3) cash flow measures and book value of equity (tied), and 4) sales. Contrary to the popular view that different industries have different ?best? multiples, we find that these overall rankings are observed consistently for almost all industries examined. Adjusting the ratio formulation typically followed in practice to allow for an intercept offers some improvement, especially for multiples that perform poorly. No improvement is observed, however, when we consider more complex measures of intrinsic value based on short-cut residual income models (where forward earnings are combined with book values, estimated discount rates, and generic terminal value estimates).
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TL;DR: In this article, a model of a firm's market value as it relates to contemporaneous and future earnings, book values, and dividends is developed and analyzed, and two owners' equity accounting constructs provide the underpinnings of the model: the clean surplus relation applies and dividends reduce current book value but do not affect current earnings.
5.8K
Investment performance of common stocks in relation to their price-earnings ratios: a test of the efficient market hypothesis
TL;DR: In this article, the authors determine empirically whether the investment performance of common stocks is related to their P/E ratios, and they find that returns on stocks with low PE ratios tend to be larger than warranted by the underlying risks, even after adjusting for any additional search and transactions costs, and differential taxes.
2.8K
Valuation and Clean Surplus Accounting for Operating and Financial Activities
TL;DR: In this paper, the relationship between market value and accounting data concerning operating and financial activities is modeled as a linear model, where market value is assumed to equal the net present value of expected future dividends, and is shown, under clean surplus accounting, to also equal book value plus the expected future abnormal earnings.
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Toward an Implied Cost of Capital
TL;DR: In this paper, the authors use a discounted residual income model to generate a market implied cost of capital, and examine firm characteristics that are systematically related to this estimate of cost-of-capital.
Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets
James J. Claus,Jacob K. Thomas +1 more
TL;DR: In this article, the authors estimate the equity premium from the discount rate that equates market valuations with prevailing expectations of future flows, and find that the average equity premium is around three percent (or less) in the United States and five other markets.