The Method of Market Multiples on the Valuation of Companies: A Multivariate Approach

José Couto (), Paula Brito () and António Cerqueira ()
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José Couto: Private company
Paula Brito: Faculdade de Economia & LIAAD INESC TEC, Universidade do Porto, Portugal
António Cerqueira: Faculdade de Economia, Universidade do Porto, Portugal

FEP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: The main goal of this study is to investigate, using multivariate analysis, the possibility of defining comparable firms as those with economic and financial characteristics closest to the company under evaluation, rather than adopting the "same industry" criterion, and thereby improve the estimation errors when the multiples valuation process is used to estimate the enterprise value and the market capitalization of a company. The analysis is performed running formal tests to compare mean values of the distributions of errors. The results obtained using cluster analysis reveal that considering comparable companies as those with economic and financial ratios closer to the company under evaluation generally reduces the mean of the estimation errors for almost all groups of ratios considered. For those groups for which the improvement is not significant, the results are similar to those obtained using the industry membership criterion.

Keywords: Cluster Analysis; Estimation Errors; Relative Valuation; Method of Multiples; Market Multiples (search for similar items in EconPapers)
JEL-codes: C38 G12 G14 G32 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2017-01
New Economics Papers: this item is included in nep-cfn
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