"A Composite Multiple-based Stock Valuation Model" by Mudita Lau, Maria Widyarini et al.
  •  
  •  
 

Creative Commons License

Creative Commons Attribution-Share Alike 4.0 International License
This work is licensed under a Creative Commons Attribution-Share Alike 4.0 International License.

Abstract

This study seeks to examine whether a composite valuation model (made of several multiples) can outperform a single-multiple valuation model in valuation accuracy. This study applied a trial-and-error iteration using scripts written in R studio to optimize the weight of each multiple in each composite, aiming to reach a minimum valuation error for each composite valuation model. Based on financial data of 2009-2019, a composite valuation model performs better than a single-multiple valuation model in assessing all peer groups, achieving up to 18% greater accuracy, which is a significant improvement. The result suggests that a composite valuation model generally offers superior valuation accuracy. Academics and institutional investors searching for improved valuation accuracy may consider a composite valuation model as an alternative method. This study adds empirical evidence to the current knowledge on multiple-based valuation models, highlighting the potential advantages of a composite valuation model over a single-multiple model.

References

Agnes Cheng, C. S., & McNamara, R. A. Y. (2000). The valuation accuracy of the price-earnings and price-book benchmark valuation methods. Review of Quantitative Finance and Accounting, 15(4), 349–370. https://doi.org/10.1023/A:1012050524545/METRICS

Alford, A. W. (1992). The Effect of the Set of Comparable Firms on the Accuracy of the Price-Earnings Valuation Method. Journal of Accounting Research, 30(1), 94. https://doi.org/10.2307/2491093

Aljifri, K., & Ahmad, H. I. (2019). Choosing Valuation Models in the UAE. Lecture Notes in Information Systems and Organisation, 30, 191–203. https://doi.org/10.1007/978-3-030-10737-6_13

Asche, F., & Misund, B. (2016). Who’s a major? A novel approach to peer group selection: Empirical evidence from oil and gas companies. Cogent Economics & Finance, 4(1). https://doi.org/10.1080/23322039.2016.1264538

Brahmana, R. K., & Hooy, C.-W. (2011). The Equity Valuation Accuracy among Multiple Screening Models: A Study from an Emerging Stock Market. International Business Management, 5(2), 50–57. https://doi.org/10.3923/ibm.2011.50.57

Chan, K. (2016). EQUITY VALUATION USING BENCHMARK MULTIPLES: AN IMPROVED APPROACH USING REGRESSION-BASED WEIGHTS. Corporate Ownership and Control, 13(4Cont3), 483–496. https://doi.org/10.22495/COCV13I4C3P7

Charumathi, B., & S, S. E. (2014). Comparing Stock Valuation Models for Indian Bank Stocks. International Journal of Accounting, 2(2), 2372–4986.

Damodaran, A. (2012). Investment valuation : tools and techniques for determining the value of any asset. John Wiley & Sons. Inc.

Deng, M., Easton, P. D., & Yeo, J. (2012). Another Look at Equity and Enterprise Valuation Based on Multiples. SSRN Electronic Journal. https://doi.org/10.2139/SSRN.1462794

Erkilet, G., Janke, G., & Kasperzak, R. (2022). How valuation approach choice affects financial analysts’ target price accuracy. Journal of Business Economics, 92(5), 741–779. https://doi.org/10.1007/S11573-021-01061-W/TABLES/7

Frensidy, B., Pelealu, R. J., & Robiyanto, R. (2020). Analysis of Equity Valuation Models and Target Price Accuracy: An Evidence From Analyst Reports in Indonesia. SAGE Open, 10(4). https://doi.org/10.1177/2158244020949507

Huikku, J., & Pöyhiä, A.-M. (2020). Sell-Side Analysts’ Valuation Model Choice: A Case Study. Nordic Journal of Business, 69(4), 39–67.

Imam, S., Chan, J., & Shah, S. Z. A. (2013). Equity valuation models and target price accuracy in Europe: Evidence from equity reports. International Review of Financial Analysis, 28, 9–19. https://doi.org/10.1016/J.IRFA.2013.02.008

Keun Yoo, Y. (2006). The valuation accuracy of equity valuation using a combination of multiples. Review of Accounting and Finance, 5(2), 108–123. https://doi.org/10.1108/14757700610668958/FULL/XML

Koesoemasari, D. S. P., Nirmala, N., Rokhayati, I., Harsuti, H., & Pamuji, U. (2023). The Relationship between Fundamental Analysis and Stock Returns Using Panel Data: Evidence from Kompas 100 Indonesia. Eduvest - Journal of Universal Studies, 3(6), 1161–1168. https://doi.org/10.59188/EDUVEST.V3I6.840

Kumar, B. R. (2019). Determinants of Relative Valuation in Different Industry Sectors—An Empirical Study. The Journal of Wealth Management, 22(1), 73–85. https://doi.org/10.3905/JWM.2019.22.1.073

Li, Y. (2021). Improving the Accuracy of Estimated Intrinsic Value Through Industry-Specific Valuation Models. Review of Business & Finance Studies, 21(1), 78–89. https://papers.ssrn.com/abstract=3942064

Lie, E., & Lie, H. J. (2002). Multiples Used to Estimate Corporate Value. Financial Analysts Journal, 58(2), 44–54. https://doi.org/10.2469/FAJ.V58.N2.2522

Namira, F., & Nugroho, B. Y. (2017). Effect of Enterprise Multiple on Stock Return Non-Financial Companies in Indonesian Stock Exchange. Bisnis & Birokrasi Journal, 23(2). https://doi.org/10.20476/jbb.v23i2.9006

Nel, S., & le Roux, N. (2017). The valuation performance of mathematically-optimised, equity-based composite multiples. Journal of Economics, Finance and Administrative Science, 22(43), 224–250. https://doi.org/10.1108/JEFAS-02-2017-0042/FULL/PDF

Nel, W., Bruwer, B., & Roux, N. le. (2013). The Impact Of Industry Classification On The Valuation Accuracy Of Multiples In The South African Capital Market. International Business & Economics Research Journal (IBER), 12(1), 79–102. https://doi.org/10.19030/IBER.V12I1.7514

Nel, W. S. (2009). The use of multiples in the South African equity market: is the popularity of the price earnings ratio justifiable from a sector perspective? Meditari Accountancy Research, 17(2), 101–115. https://doi.org/10.1108/10222529200900014

Öcal, H., & Kamil, A. A. (2021). Risk-Return Based Performance Evaluation of Stocks in BIST 100 and KOMPAS 100 Indices of Borsa Istanbul and Indonesian Stock Exchange. SciPap 2021, Vol. 29, Article 1283, 29(2). https://doi.org/10.46585/SP29021283

Penman, S. H. (1998). Combining Earnings and Book Value in Equity Valuation*. Contemporary Accounting Research, 15(3), 291–324. https://doi.org/10.1111/J.1911-3846.1998.TB00562.X

Penman, S. H. (2013). Financial Statement Analysis and Security Valuation (5th ed.). McGraw-Hill.

Pinto, J. E., Robinson, T. R., & Stowe, J. D. (2019). Equity valuation: A survey of professional practice. Review of Financial Economics, 37(2), 219–233. https://doi.org/10.1002/RFE.1040

Pratama, A. (2021). Tumbuh Pesat, Jumlah Investor Saham di BEI Bertambah Satu Juta di 2021. IDX Channel. https://www.idxchannel.com/market-news/tumbuh-pesat-jumlah-investor-saham-di-bei-bertambah-satu-juta-di-2021

Prusak, B. (2017). The accuracy of alternative stock valuation methods – the case of the Warsaw Stock Exchange. Economic Research-Ekonomska Istraživanja, 30(1), 416–438. https://doi.org/10.1080/1331677X.2017.1305793

Rossi, E., & Forte, G. (2016b). Assessing relative valuation in equity markets: Bridging research and practice. Assessing Relative Valuation in Equity Markets: Bridging Research and Practice, 1–180. https://doi.org/10.1057/978-1-137-56335-4/COVER

Schreiner, A. (2007). Equity valuation using multiples: An empirical investigation. In Equity Valuation Using Multiples: An Empirical Investigation. Springer Gabler. https://doi.org/10.1007/978-3-8350-9531-1/COVER

Sehgal, S., & Pandey, A. (2010). Equity Valuation Using Price Multiples: A Comparative Study for BRICKS. Asian Journal of Finance & Accounting, 2(1), 68–91. https://doi.org/10.5296/AJFA.V2I1.283

Sutedja, B. S., Yakob, N. A., & McGowan, C. B. (2014). Relative Valuation Approach for Valuing Equity in Malaysia. Handbook of Asian Finance: REITs, Trading, and Fund Performance, 2, 207–223. https://doi.org/10.1016/B978-0-12-800986-4.00011-X

Yooyanyong, P., Suwanragsa, I., & Tangjitprom, N. (2020). The Accuracy of Various Value Drivers of Price Multiple Method in Determining Equity Price. The Journal of Asian Finance, Economics and Business, 7(1), 29–36. https://doi.org/10.13106/JAFEB.2020.VOL7.NO1.29

JBB - Statement of Authorship.docx (13 kB)
Statement of Authorship

JBB - Reviewer Comments and Revisions Table.docx (18 kB)
Reviewer Comments and Revisions Table

Feedback_and_article_revision_JBB_Investigating_Banking_Research FINAL.docx (32 kB)
Reviewer Comments and Revisions Table

First Page

83

Last Page

93

Share

COinS
 
 

To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.