[go: up one dir, main page]

IDEAS home Printed from https://ideas.repec.org/a/fau/fauart/v69y2019i1p37-75.html
   My bibliography  Save this article

Earnings Stability and Peer Company Selection for Multiple Based Indirect Valuation

Author

Listed:
  • Karel Janda

    (Department of Banking and Insurance, Faculty of Finance and Accounting, University of Economics, Prague, Czech Republic
    Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)

Abstract
We contribute to the development of indirect valuation method for publicly traded companies. We introduce relative earning stability as a new dimension of peer selection criteria for determination of appropriate comparable group of peer companies to the evaluated company. Based on large sample of all publicly traded companies in Thomson Reuters database over recent 35 years, we provide empirical evidence of significant improvement of indirect valuation accuracy and precision as a result of our relative earning stability approach. Peer selection based on the relative earnings stability takes account of some idiosyncrasies of companies, which remain uncaptured by traditional industrial classification based peer selection methods. We also empirically establish superiority of a within-company price to earnings (PE) valuation technique for the most stable companies. Our empirical results are robust against different means of operationalization of the stability criterion and indirect valuation methods.

Suggested Citation

  • Karel Janda, 2019. "Earnings Stability and Peer Company Selection for Multiple Based Indirect Valuation," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 69(1), pages 37-75, February.
  • Handle: RePEc:fau:fauart:v:69:y:2019:i:1:p:37-75
    as

    Download full text from publisher

    File URL: http://journal.fsv.cuni.cz/storage/1428_37_75_janda_final_issue_1_2019.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. MacKinnon, James G & Magee, Lonnie, 1990. "Transforming the Dependent Variable in Regression Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 315-339, May.
    2. Franck Bancel & Usha R. Mittoo, 2014. "The Gap between the Theory and Practice of Corporate Valuation: Survey of European Experts[We are ext]," Journal of Applied Corporate Finance, Morgan Stanley, vol. 26(4), pages 106-117, December.
    3. George J. Stigler, 1963. "Capital and Rates of Return in Manufacturing Industries," NBER Books, National Bureau of Economic Research, Inc, number stig63-1.
    4. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, April.
    5. Burton G. Malkiel, 1970. "The Valuation of Public Utility Equities," Bell Journal of Economics, The RAND Corporation, vol. 1(1), pages 143-160, Spring.
    6. Cheng, C S Agnes & McNamara, Ray, 2000. "The Valuation Accuracy of the Price-Earnings and Price-Book Benchmark Valuation Methods," Review of Quantitative Finance and Accounting, Springer, vol. 15(4), pages 349-370, December.
    7. Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
    8. Hamid Sakaki & Dave Jackson & Surendranath Jory, 2017. "Institutional ownership stability and real earnings management," Review of Quantitative Finance and Accounting, Springer, vol. 49(1), pages 227-244, July.
    9. Michael R. Strain, 2017. "Do volatile firms pay volatile earnings? Evidence from linked worker-firm data," Applied Economics, Taylor & Francis Journals, vol. 49(43), pages 4299-4309, September.
    10. Pierre Vernimmen & Pascal Quiry & Maurizio Dallocchio & Yann Le Fur & Antonio Salvi, 2018. "Corporate Finance : Theory and Practice," Post-Print hal-02298273, HAL.
    11. Michal Kaszas & Karel Janda, 2018. "Indirect Valuation and Earnings Stability: Within-Company Use of the Earnings Multiple," Springer Proceedings in Business and Economics, in: David Procházka (ed.), The Impact of Globalization on International Finance and Accounting, pages 161-172, Springer.
    12. Sudipta Basu & Truong Xuan Duong & Stanimir Markov & Eng-Joo Tan, 2013. "How Important are Earnings Announcements as an Information Source?," European Accounting Review, Taylor & Francis Journals, vol. 22(2), pages 221-256, June.
    13. Asquith, Paul & Mikhail, Michael B. & Au, Andrea S., 2005. "Information content of equity analyst reports," Journal of Financial Economics, Elsevier, vol. 75(2), pages 245-282, February.
    14. Sanjeev Bhojraj & Charles M. C. Lee, 2002. "Who Is My Peer? A Valuation‐Based Approach to the Selection of Comparable Firms," Journal of Accounting Research, Wiley Blackwell, vol. 40(2), pages 407-439, May.
    15. Myron J. Gordon & Eli Shapiro, 1956. "Capital Equipment Analysis: The Required Rate of Profit," Management Science, INFORMS, vol. 3(1), pages 102-110, October.
    16. Lev, Baruch, 1983. "Some economic determinants of time-series properties of earnings," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 31-48, April.
    17. Stephen H. Penman & Theodore Sougiannis, 1998. "A Comparison of Dividend, Cash Flow, and Earnings Approaches to Equity Valuation," Contemporary Accounting Research, John Wiley & Sons, vol. 15(3), pages 343-383, September.
    18. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
    19. Collins, Daniel W. & Maydew, Edward L. & Weiss, Ira S., 1997. "Changes in the value-relevance of earnings and book values over the past forty years," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 39-67, December.
    20. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    21. William R. Gebhardt & Charles M. C. Lee & Bhaskaran Swaminathan, 2001. "Toward an Implied Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 135-176, June.
    22. Batabyal, Sourav & Robinson, Richard, 2017. "Capital change and stability when dividends convey signals," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 158-167.
    23. Shahed Imam & Richard Barker & Colin Clubb, 2008. "The Use of Valuation Models by UK Investment Analysts," European Accounting Review, Taylor & Francis Journals, vol. 17(3), pages 503-535.
    24. David Aboody & John Hughes & Jing Liu, 2002. "Measuring Value Relevance in a (Possibly) Inefficient Market," Journal of Accounting Research, Wiley Blackwell, vol. 40(4), pages 965-986, September.
    25. Lee, Charles M.C. & Ma, Paul & Wang, Charles C.Y., 2015. "Search-based peer firms: Aggregating investor perceptions through internet co-searches," Journal of Financial Economics, Elsevier, vol. 116(2), pages 410-431.
    26. Alan M Rugman, 1976. "Risk Reduction by International Diversification," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 7(2), pages 75-80, June.
    27. Alford, Aw, 1992. "The Effect Of The Set Of Comparable Firms On The Accuracy Of The Price Earnings Valuation Method," Journal of Accounting Research, Wiley Blackwell, vol. 30(1), pages 94-108.
    28. Victor Zarnowitz, 1967. "An Appraisal of Short-Term Economic Forecasts," NBER Books, National Bureau of Economic Research, Inc, number zarn67-1.
    29. Dechow, Patricia M. & Hutton, Amy P. & Sloan, Richard G., 1999. "An empirical assessment of the residual income valuation model1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 1-34, January.
    30. George J. Stigler, 1963. "Introduction to "Capital and Rates of Return in Manufacturing Industries"," NBER Chapters, in: Capital and Rates of Return in Manufacturing Industries, pages 3-10, National Bureau of Economic Research, Inc.
    31. Janda, Karel & Kaszas, Micha, 2017. "Indirect Firm Valuation and Earnings Stability," MPRA Paper 77234, University Library of Munich, Germany.
    32. Thomas R. Stauffer, 1971. "The Measurement of Corporate Rates of Return: A Generalized Formulation," Bell Journal of Economics, The RAND Corporation, vol. 2(2), pages 434-469, Autumn.
    33. Bohumil Stádník & Jurgita Raudeliūnienė & Vida Davidavičienė, 2016. "Fourier Analysis for Stock Price Forecasting: Assumption and Evidence," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 17(3), pages 365-380, June.
    34. Lev, B, 1989. "On The Usefulness Of Earnings And Earnings Research - Lessons And Directions From 2 Decades Of Empirical-Research," Journal of Accounting Research, Wiley Blackwell, vol. 27, pages 153-192.
    35. Baumol, William J, et al, 1970. "Earnings Retention, New Capital and the Growth of the Firm," The Review of Economics and Statistics, MIT Press, vol. 52(4), pages 345-355, November.
    36. Dichev, Ilia D. & Tang, Vicki Wei, 2009. "Earnings volatility and earnings predictability," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 160-181, March.
    37. Stephen H. Archer & LeRoy G. Faerber, 1966. "Firm Size And The Cost Of Externally Secured Equity Capital," Journal of Finance, American Finance Association, vol. 21(1), pages 69-83, March.
    38. Francis, J & Olsson, P & Oswald, DR, 2000. "Comparing the accuracy and explainability of dividend, free cash flow, and abnormal earnings equity value estimates," Journal of Accounting Research, Wiley Blackwell, vol. 38(1), pages 45-70.
    39. Givoly, Dan & Hayn, Carla, 2000. "The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative?," Journal of Accounting and Economics, Elsevier, vol. 29(3), pages 287-320, June.
    40. Jing Liu & Doron Nissim & Jacob Thomas, 2002. "Equity Valuation Using Multiples," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 135-172, March.
    41. Ray Ball & Lakshmanan Shivakumar, 2008. "How Much New Information Is There in Earnings?," Journal of Accounting Research, Wiley Blackwell, vol. 46(5), pages 975-1016, December.
    42. Lev, Baruch, 1974. "On the Association between Operating Leverage and Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(4), pages 627-641, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Janda, Karel & Kaszas, Micha, 2017. "Indirect Firm Valuation and Earnings Stability," MPRA Paper 77234, University Library of Munich, Germany.
    2. Imam, Shahed & Chan, Jacky & Shah, Syed Zulfiqar Ali, 2013. "Equity valuation models and target price accuracy in Europe: Evidence from equity reports," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 9-19.
    3. Yuan Yin & Ken Peasnell & Herbert G. Hunt, 2018. "How do sell-side analysts obtain price-earnings multiples to value firms?," Accounting and Business Research, Taylor & Francis Journals, vol. 48(1), pages 108-135, January.
    4. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    5. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    6. Marc Deloof & Wouter De Maeseneire & Koen Inghelbrecht, 2009. "How Do Investment Banks Value Initial Public Offerings (IPOs)?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1‐2), pages 130-160, January.
    7. Olbert, Lars, 2024. "Identifying gaps between research results and education," Journal of Accounting Education, Elsevier, vol. 66(C).
    8. Yanfu Li, 2019. "Improving Analyst Target Price Performance Through Enhanced Valuation Techniques," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 13(2), pages 1-12.
    9. Marc Deloof & Wouter De Maeseneire & Koen Inghelbrecht, 2009. "How Do Investment Banks Value Initial Public Offerings (IPOs)?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1‐2), pages 130-160, January.
    10. Marcel Ausloos, 2020. "Valuation Models Applied to Value-Based Management—Application to the Case of UK Companies with Problems," Forecasting, MDPI, vol. 2(4), pages 1-17, December.
    11. Dittmann, I. & Maug, E.G., 2006. "Valuation Biases, Error Measures, and the Conglomerate Discount," ERIM Report Series Research in Management ERS-2006-011-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    12. Aharon, David Y. & Gavious, Ilanit & Yosef, Rami, 2010. "Stock market bubble effects on mergers and acquisitions," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(4), pages 456-470, November.
    13. Bassam M. ABU-ABBAS, 2021. "The Role of Dividends on Equity Valuation: Evidence from the GCC Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 162-180, June.
    14. Ran Barniv & Mark Myring, 2006. "An International Analysis of Historical and Forecast Earnings in Accounting‐Based Valuation Models," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(7‐8), pages 1087-1109, September.
    15. Peter Roosenboom, 2007. "How Do Underwriters Value Initial Public Offerings? An Empirical Analysis of the French IPO Market," Contemporary Accounting Research, John Wiley & Sons, vol. 24(4), pages 1217-1243, December.
    16. repec:dau:papers:123456789/4142 is not listed on IDEAS
    17. WS Nel, 2015. "An Optimal Peer Group Selection Strategy for Multiples-Based Modelling in the South African Equity Market," Journal of Economics and Behavioral Studies, AMH International, vol. 7(3), pages 30-46.
    18. Frank Asche & Bård Misund, 2016. "Who’s a major? A novel approach to peer group selection: Empirical evidence from oil and gas companies," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1264538-126, December.
    19. Vidal-Garcia Raül & Ribal Javier, 2019. "Terminal Value in SMEs: Testing the Multiple EV/EBITDA Approach," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 14(1), pages 1-11, February.
    20. Meitner, Matthias, 2003. "Option-Style Multi-Factor Comparable Company Valuation for Practical Use," ZEW Discussion Papers 03-76, ZEW - Leibniz Centre for European Economic Research.
    21. Soenke Sievers & Christopher F. Mokwa & Georg Keienburg, 2012. "The Relevance of Financial versus Non-Financial Information for the Valuation of Venture Capital-Backed Firms," European Accounting Review, Taylor & Francis Journals, vol. 22(3), pages 467-511, September.

    More about this item

    Keywords

    multiple valuation; earnings stability; earnings properties; peer selection;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fau:fauart:v:69:y:2019:i:1:p:37-75. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Natalie Svarcova (email available below). General contact details of provider: https://edirc.repec.org/data/icunicz.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.