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2018 | OriginalPaper | Buchkapitel

Indirect Valuation and Earnings Stability: Within-Company Use of the Earnings Multiple

verfasst von : Michal Kaszas, Karel Janda

Erschienen in: The Impact of Globalization on International Finance and Accounting

Verlag: Springer International Publishing

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Abstract

This paper investigates statistical significance of earnings stability in the within-company indirect valuation method. We empirically establish superiority of a within-company earnings multiple valuation technique for the relatively most stable companies. Favorable empirical results are robust against different means of operationalization of the stability construct and valuation multiples. Results of this paper indicate that the indirect within-company price-to-earnings valuation yields the most precise and the most accurate value estimates.

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Vorheriges Kapitel A Note on the Gordon Growth Model with Taxes

Nächstes Kapitel Measurement of Profit Losses from Brand Damage: The Case of an Unlisted Company

Nur mit Berechtigung zugänglich

We exploit the superiority of the residual income valuation formula, provided by Penman and Sougiannis (1998) and Francis et al. (2000), over other valuation techniques.

Literature refers to a company in a stable state if the company earns return on its equity capital equaling the cost of its equity capital (Stauffer 1971).

Archer and Faerber (1966) show empirically a negative correlation between the cost of equity capital of the company and its size, its leverage, its age, and variation of its earnings. Lev (1983) finds leverage and size of the company as two of a few factors causing earnings stability. Building on the empirical evidence of subsample of stable companies with low cost of equity, we assume that variation of the cost of equity capital of these companies closely approximates stability.

Bhojraj and Lee (2002) follow nominal specification of the criterion (Sales <100 MIO USD); however, with respect to international character of this study and the fact that accounting numbers are in local currencies, we erase companies at year T if they belong to the bottom percentile of sales figure constructed on a country basis at year T-1.

While the mean PE ratio of the top 5 deleted percentile groups across all years equals 7917.2 and median 2087.6, the values for the bottom 5 percentile groups are 2.41 and 2.37, respectively.

We include a company-year observation into a “subsample of peer companies” if the company year observation is from the same year, country, industry, and stability decile.

This approach is focused on the time-series within-company relation between earnings and market value. As favorable we consider the outcome where the general linear hypothesis that earnings coefficient equals one is met.

We impose an assumption that during the 4-month period, all companies manage to report their annual results. At the same time, this treatment assumes that at the date of market value measurement, the price effectively reflects fundaments.

We use the standard deviation as a complementary statistic, but we argue that it is prone to be sensitive, hence exposed to the effect of extreme values.

Except for the 2nd stability decile group for which the coefficient is even slightly higher than for the most stable decile group. We argue that this is possible an effect of insufficient outlier treatment.

Results for price to sales and price to free cash flows techniques are untabulated, but their tenor remains.

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Titel: Indirect Valuation and Earnings Stability: Within-Company Use of the Earnings Multiple
verfasst von: Michal Kaszas
Karel Janda
Verlag: Springer International Publishing
Buch: The Impact of Globalization on International Finance and Accounting
Print ISBN: 978-3-319-68761-2

Electronic ISBN: 978-3-319-68762-9

Copyright-Jahr: 2018
DOI: https://doi.org/10.1007/978-3-319-68762-9_18