Equity Valuation Using Multiples: An Empirical Investigation

Accounting-based market multiples are the most common technique in equity valuation. Multiples are used in research reports and stock recommendations ofboth buy-side and sell-side analysts, in fairness opinions and pitch books of investment bankers, or at road shows offirms seeking an IPO. Even in cases where the value of a corporation is primarily determined with discounted cash flow, multiples such as PIE or market-to-book play the important role of providing a second opinion. Mul­ tiples thus form an important basis of investment and transaction decisions of vari­ ous types of investors including corporate executives, hedge funds, institutional in­ vestors, private equity firms, and also private investors. In spite of their prevalent usage in practice, not so much theoretical back­ ground is provided to guide the practical application of multiples. The literature on corporate valuation gives only sparse evidence on how to apply multiples or on why individual multiples or comparable firms should be selected in a particular context.