The time series behaviour of regression based valuation multiples

Cavan Reid (2011). The time series behaviour of regression based valuation multiples Honours Thesis, UQ Business School, The University of Queensland.

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Cavan_Reid_BCom_Hons_Thesis.pdf Honours Thesis application/pdf 667.35KB 11
Author Cavan Reid
Thesis Title The time series behaviour of regression based valuation multiples
School, Centre or Institute UQ Business School
Institution The University of Queensland
Publication date 2011-10-27
Thesis type Honours Thesis
Supervisor Professor Jerry Bowman
Total colour pages 87
Language eng
Subjects 1502 Banking, Finance and Investment
Abstract/Summary The use of valuation multiples is of significant importance to financial practitioners. These multiples are used to value firms in many different contexts, including initial public offerings, mergers and acquisitions and analyst reports. This study contributes to practitioner valuation and academic literature by examining a relatively untested method for estimating valuation multiples. This method uses regression analysis to estimate valuation multiples from the ‘fundamental drivers’ of a multiple. I thoroughly test the cross sectional valuation accuracy of this method relative to a benchmark multiple, derived from industry comparable firms. I find the regression method has a far superior ability to explain the cross sectional variation of valuation multiples. I then examine the ability of the regression method to explain time series movements in valuation multiples. I find that, firms which have a valuation multiple higher than predicted by the regression method converge towards that predicted multiple. However, the benchmark industry based method does not exhibit the same strong convergence. Lastly, I test whether valuing firms using this regression technique can help identify under or overvalued firms and generate abnormal returns. I find that the regression method does not help generate abnormal returns. I conclude that convergence towards the predicted multiple for firms with high valuation multiples is due to an adjustment in the value driver. The application of this method by practitioners may improve the accuracy of valuations and will help empirically justify predictions of future variation in multiples.

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Created: Thu, 28 Jun 2012, 14:32:08 EST by Karen Morgan on behalf of UQ Business School