Negative Value Indicators in Relative Valuation – An Empirical Perspective

Sommer Friedrich (), Rose Christian () and Wöhrmann Arnt ()
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Sommer Friedrich: Münster School of Business and Economics, University of Münster, Universitätsstraße 14-16, D-48143 Münster, Germany
Rose Christian: University of Münster, Münster, Germany
Wöhrmann Arnt: University of Münster, Münster, Germany

Journal of Business Valuation and Economic Loss Analysis, 2014, vol. 9, issue 1, 23-54

Abstract: This study investigates whether firms with negative value indicators (e.g. negative EBIT) should be excluded from peer groups in relative valuation. While this approach is chosen in many empirical studies and recommended by practitioners, valuation textbooks suggest including firms with negative value indicators in the peer groups. Evidence regarding which alternative leads to more accurate firm value estimates is missing. We conduct an empirical study using a sample from the S&P Composite 1,500 Index for the period 1994–2010 to answer this question. We find that, contrary to textbook recommendations, eliminating firms with negative value indicators generally leads to more accurate firm value estimates.

Keywords: relative valuation; comparables; multiples; negative earnings; losses (search for similar items in EconPapers)
JEL-codes: G17 G34 M41 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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DOI: 10.1515/jbvela-2013-0024

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