DO FUNDAMENTALLY-ADJUSTED VALUATION MULTIPLES IMPROVE VALUATION ACCURACY? THE CASE OF THE POLISH STOCK MARKET

Jacek Welc

Accounting & Taxation, 2011, vol. 3, issue 1, 57-70

Abstract: A series of popular stock investment strategies are based on buying stocks with low valuation multiples. These strategies assume that low multiples signal undervaluation. However, the low multiples can be justified by fundamentals. In such cases even stocks with very low multiples can be overvalued. In this paper regression analysis is used to identify the impact of fundamentals on multiples. The multiples are the dependent variable and the accounting ratios are the explanatory variables. Such a regression enables the estimation of the fundamentally-adjusted multiple. The regression residuals measure the scope of undervaluation / overvaluation. Using this approach, the most undervalued (overvalued) stocks are those with the most negative (positive) residuals (and not the stocks with the lowest actual multiples). We compared the profitability of strategies based on low actual multiples with the profitability of strategies based on actual and fundamentally-adjusted multiples. Data from the Polish stock market from 1998-2010 are examined. The research found that allowing for the impact of accounting fundamentals on multiples can increase the accuracy of valuation in the case of P/S multiple but not in the case of P/E and P/BV multiples.

Keywords: corporate valuation; relative valuation; investment strategies; valuation multiples (search for similar items in EconPapers)
JEL-codes: C21 G11 (search for similar items in EconPapers)
Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.theibfr2.com/RePEc/ibf/acttax/at-v3n1-2011/AT-V3N1-2011-5.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ibf:acttax:v:3:y:2011:i:1:p:57-70

Access Statistics for this article

Accounting & Taxation is currently edited by Terrance Jalbert

More articles in Accounting & Taxation from The Institute for Business and Finance Research
Bibliographic data for series maintained by Mercedes Jalbert ( this e-mail address is bad, please contact ).