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The Method of Market Multiples on the Valuation of Companies: A Multivariate Approach

Author

Listed:
  • José Couto

    (Private company)

  • Paula Brito

    (Faculdade de Economia & LIAAD INESC TEC, Universidade do Porto, Portugal)

  • António Cerqueira

    (Faculdade de Economia, Universidade do Porto, Portugal)

Abstract

The main goal of this study is to investigate, using multivariate analysis, the possibility of defining comparable firms as those with economic and financial characteristics closest to the company under evaluation, rather than adopting the "same industry" criterion, and thereby improve the estimation errors when the multiples valuation process is used to estimate the enterprise value and the market capitalization of a company. The analysis is performed running formal tests to compare mean values of the distributions of errors. The results obtained using cluster analysis reveal that considering comparable companies as those with economic and financial ratios closer to the company under evaluation generally reduces the mean of the estimation errors for almost all groups of ratios considered. For those groups for which the improvement is not significant, the results are similar to those obtained using the industry membership criterion.

Suggested Citation

  • José Couto & Paula Brito & António Cerqueira, 2017. "The Method of Market Multiples on the Valuation of Companies: A Multivariate Approach," FEP Working Papers 586, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:fepwps:586
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Cluster Analysis; Estimation Errors; Relative Valuation; Method of Multiples; Market Multiples;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis

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