Does Consistency Improve Multiple Quality?

46 Pages Posted: 10 Mar 2011 Last revised: 17 Sep 2013

See all articles by Alberto Chullen

Alberto Chullen

Handelshochschule Leipzig (HHL)

Hannes Kaltenbrunner

Handelshochschule Leipzig (HHL)

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance

Date Written: September 15, 2013

Abstract

In this paper we analyze the impact of consistency upon the accuracy of corporate values estimates provided by multiple-based valuation methods. Based on a sample with more than 6,000 firm years from German firms we find consistent multiple definitions generally to outperform inconsistent ones. The first layer consistency requirement of properly matching entity figures and equity figures increases the valuation accuracy in all cases. In a deeper analysis with respect to consistent enterprise value definitions, in the vast majority of cases consistent definitions still outperform inconsistent ones. We find that consistent treatment of financial leases, pensions, preferred stocks and minority interest generally increases the valuation accuracy. However for two balance sheet variables we find mixed evidence: For accounts payables, the inclusion results in a higher valuation accuracy for all enterprise value multiples, whereas under our hypothesis it should only do so for the EV/sales multiplier. For investments in associates and joint ventures, we also get opaque results with respect to consistency. Within the class of consistently defined multiples EBITDA multiples have the highest valuation performance followed by EBIT, net income and sales based multiples.

Keywords: valuation, multiples

JEL Classification: G15, G24, M41

Suggested Citation

Chullen, Alberto and Kaltenbrunner, Hannes and Schwetzler, Bernhard, Does Consistency Improve Multiple Quality? (September 15, 2013). Available at SSRN: https://ssrn.com/abstract=1782815 or http://dx.doi.org/10.2139/ssrn.1782815

Alberto Chullen

Handelshochschule Leipzig (HHL) ( email )

Jahnallee 59
Leipzig, D-04109
Germany

Hannes Kaltenbrunner

Handelshochschule Leipzig (HHL) ( email )

Jahnallee 59
Leipzig, D-04109
Germany

Bernhard Schwetzler (Contact Author)

HHL Leipzig Graduate School of Management - Department of Finance ( email )

Jahnallee 59
D-04109 Leipzig
Germany
+49-341-9851-685 (Phone)
+49-341-9851-689 (Fax)

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