Why Do Enterprise Multiples Predict Expected Stock Returns?

The Journal of Portfolio Management November 2019, 46 (1) 123-138; DOI: https://doi.org/10.3905/jpm.2019.1.105

Posted: 5 Oct 2016 Last revised: 15 Jan 2020

See all articles by Steve Crawford

Steve Crawford

University of Houston

Wesley R. Gray

Alpha Architect

Jack Vogel

Alpha Architect; Villanova University

Date Written: October 17, 2018

Abstract

The enterprise multiple (EM) effect has been documented across global stock markets. EM is a robust predictor of expected average returns and generates a stronger value effect than traditional value metrics. We find evidence the EM effect is primarily attributable to mispricing and cannot be explained by higher systematic risk. We document that earnings announcement returns, forecast errors, and forecast revisions all support the notion that the EM effect is driven by mispricing associated with predictable investor expectation errors. Finally, we show that the EM effect is stronger during times of strong market sentiment, which also supports the mispricing-based hypothesis.

Keywords: Value Investing, Value Anomaly, Enterprise Multiples, Abnormal Returns, Market Efficiency

JEL Classification: G10, G11, G14

Suggested Citation

Crawford, Steve and Gray, Wesley R. and Vogel, Jack, Why Do Enterprise Multiples Predict Expected Stock Returns? (October 17, 2018). The Journal of Portfolio Management November 2019, 46 (1) 123-138; DOI: https://doi.org/10.3905/jpm.2019.1.105, Available at SSRN: https://ssrn.com/abstract=2847874 or http://dx.doi.org/10.2139/ssrn.2847874

Steve Crawford

University of Houston ( email )

4800 Calhoun Road
Houston, TX 77204
United States

Wesley R. Gray (Contact Author)

Alpha Architect ( email )

19 East Eagle Road
Havertown, PA 19083
United States
7732304727 (Phone)

HOME PAGE: http://https://alphaarchitect.com/

Jack Vogel

Alpha Architect ( email )

19 E. Eagle Road
Havertown, PA 19083
United States
215-882-9983 (Phone)

HOME PAGE: http://alphaarchitect.com/

Villanova University ( email )

Villanova, PA 19085
United States

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