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Do Fundamentally-Adjusted Valuation Multiples Improve Valuation Accuracy? The Case Of The Polish Stock Market

Author

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  • Jacek Welc

Abstract

A series of popular stock investment strategies are based on buying stocks with low valuation multiples. These strategies assume that low multiples signal undervaluation. However, the low multiples can be justified by fundamentals. In such cases even stocks with very low multiples can be overvalued. In this paper regression analysis is used to identify the impact of fundamentals on multiples. The multiples are the dependent variable and the accounting ratios are the explanatory variables. Such a regression enables the estimation of the fundamentally-adjusted multiple. The regression residuals measure the scope of undervaluation / overvaluation. Using this approach, the most undervalued (overvalued) stocks are those with the most negative (positive) residuals (and not the stocks with the lowest actual multiples). We compared the profitability of strategies based on low actual multiples with the profitability of strategies based on actual and fundamentally-adjusted multiples. Data from the Polish stock market from 1998-2010 are examined. The research found that allowing for the impact of accounting fundamentals on multiples can increase the accuracy of valuation in the case of P/S multiple but not in the case of P/E and P/BV multiples.

Suggested Citation

  • Jacek Welc, 2011. "Do Fundamentally-Adjusted Valuation Multiples Improve Valuation Accuracy? The Case Of The Polish Stock Market," Accounting & Taxation, The Institute for Business and Finance Research, vol. 3(1), pages 57-70.
    • Handle: RePEc:ibf:acttax:v:3:y:2011:i:1:p:57-70
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    Cited by:

    1. Antonio J. Dayag & Fernando Trinidad, 2019. "Price-Earnings Multiple as an Investment Assessment Tool in Analyzing Stock Market Performance of Selected Universal Banks in the Philippines," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 8(4), pages 17-33, July.
    2. Jacek Welc, 2014. "Impact of Earnings Smoothness on Stock Prices, Stock Returns and Future Earnings Changes - the Polish Experience," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2014(3), pages 67-94.

    More about this item

    Keywords

    corporate valuation; relative valuation; investment strategies; valuation multiples;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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