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Earnings Stability and Peer Selection for Indirect Valuation

Author

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  • Karel Janda

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic
    Department of Banking and Insurance, Faculty of Finance and Accounting, University of Economics, Namesti Winstona Churchilla 4, 13067 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 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, 2018. "Earnings Stability and Peer Selection for Indirect Valuation," Working Papers IES 2018/14, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2018.
    • Handle: RePEc:fau:wpaper:wp2018_14
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    File URL: http://ies.fsv.cuni.cz/sci/publication/show/id/5856/lang/cs
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    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

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