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Equity Valuation Using Price Multiples: A Comparative Study for BRICKS

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  • Sanjay Sehgal
  • Asheesh Pandey

Abstract

In this paper, we evaluate the efficacy of three value drivers namely, earnings per share, book value and sales for developing stock price forecasts using two performance evaluation criteria- 1) Root Mean Squared Error and 2) Thail Inequality Coefficient. We employ data for BRICKS economies excluding Russia from 1993-2007. We conduct our analysis in three phases. In phase one we find that price to book value is the best standalone price multiple for the Asian economies (India, China and South Korea) while price to earnings does a better job for equity valuation in case of Brazil and South Africa. In the next phase we show that combination of value drivers do not significantly improve price forecast vis-à-vis standalone multiples. Our findings are in contrast with those for developed markets as shown by Penman (1996). We also find that in Indian context market regression is a better tool for price forecasting compared to sector regression as larger number of observations result in better estimator for our forecast equation. Our findings are extremely relevant for equity analysts and portfolio managers who are continuously involved in equity evaluation and developing global asset allocation strategies. Keywords- Price Earnings Ratio, Price to Book Value ratio, Relative Valuation, Price Multiples, Discounted Cash flowsJEL Classifications- C51, C52, G11, G15

Suggested Citation

  • Sanjay Sehgal & Asheesh Pandey, 2010. "Equity Valuation Using Price Multiples: A Comparative Study for BRICKS," Asian Journal of Finance & Accounting, Macrothink Institute, vol. 2(1), pages 6891-6891, December.
  • Handle: RePEc:mth:ajfa88:v:2:y:2010:i:1:p:68-91
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    References listed on IDEAS

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    1. Da, Zhi & Schaumburg, Ernst, 2011. "Relative valuation and analyst target price forecasts," Journal of Financial Markets, Elsevier, vol. 14(1), pages 161-192, February.
    2. 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.
    3. Sanjay Sehgal & Asheesh Pandey, 2010. "Equity Valuation Using Price Multiples: Evidence from India," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 6(1), pages 89-108.
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    Cited by:

    1. Sanjay Sehgal & Asheesh Pandey, 2013. "An Empirical Investigation of the Relationship between Net Stock Issues and Returns in India," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 38(4), pages 505-515, November.
    2. Ganapathy G Gangadharan & N. Suresh, 2022. "Interrogation of A Bubble in the Indian Market," Papers 2207.13444, arXiv.org.
    3. Harish Kumar Singla & Anand Prakash, 2021. "Financial determinants of value based performance of construction firms in India," International Journal of Productivity and Performance Management, Emerald Group Publishing Limited, vol. 72(4), pages 1025-1050, October.

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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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