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Negative Value Indicators in Relative Valuation – An Empirical Perspective

Author

Listed:
  • Sommer Friedrich

    (Münster School of Business and Economics, University of Münster, Universitätsstraße 14-16, D-48143 Münster, Germany)

  • Rose Christian

    (University of Münster, Münster, Germany)

  • Wöhrmann Arnt

    (University of Münster, Münster, Germany)

Abstract

This study investigates whether firms with negative value indicators (e.g. negative EBIT) should be excluded from peer groups in relative valuation. While this approach is chosen in many empirical studies and recommended by practitioners, valuation textbooks suggest including firms with negative value indicators in the peer groups. Evidence regarding which alternative leads to more accurate firm value estimates is missing. We conduct an empirical study using a sample from the S&P Composite 1,500 Index for the period 1994–2010 to answer this question. We find that, contrary to textbook recommendations, eliminating firms with negative value indicators generally leads to more accurate firm value estimates.

Suggested Citation

  • Sommer Friedrich & Rose Christian & Wöhrmann Arnt, 2014. "Negative Value Indicators in Relative Valuation – An Empirical Perspective," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 9(1), pages 23-54, January.
    • Handle: RePEc:bpj:jbvela:v:9:y:2014:i:1:p:32:n:6
    DOI: 10.1515/jbvela-2013-0024
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    References listed on IDEAS

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    1. 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.
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    8. 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.
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    Cited by:

    1. Scheuplein, Christoph & Teetz, Florian, 2017. "Private-Equity-Aktivitäten in Deutschland 2014/2015: Eine Analyse von Buyouts, Exits und Private-Equity-Gesellschaften," Study / edition der Hans-Böckler-Stiftung, Hans-Böckler-Stiftung, Düsseldorf, volume 127, number 367, March.

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    More about this item

    Keywords

    relative valuation; comparables; multiples; negative earnings; losses;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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