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Does consistency improve accuracy in multiple—based valuation?

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In this paper we analyze the impact of consistency upon the accuracy of corporate values estimates provided by multiple-based valuation methods. Based on a sample with more than 6000 firm years from German firms we find consistent multiple definitions outperform in most cases inconsistent ones. The first layer consistency requirement of properly matching entity figures and equity figures increases the valuation accuracy in all cases. In a deeper analysis with respect to consistent enterprise value definitions, in the majority of cases consistent definitions still outperform inconsistent ones. We find that consistent treatment of financial leases, pensions and minority interest generally increases the valuation accuracy. However for balance sheet variable accounts payables we find mixed evidence: the inclusion results in a higher valuation accuracy for all enterprise value multiples, whereas under our hypothesis it should only do so for the EV/sales multiplier. For investments in associates and joint ventures, an inconsistent treatment also results in a higher valuation accuracy. Within the class of consistently defined multiples EBITDA multiples have the highest valuation performance followed by EBIT, net income and sales based multiples.

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  1. Mean percentage errors are well above 100 % in many cases; results on percentage errors are not shown in this study, but are available from the authors on request.

  2. In contrast to our approach Sommer and Wöhrmann (2013) include accounts payable in their debt/net debt definition for all enterprise value definitions independent of the operating earnings measure. (see, Sommer and Wöhrmann 2013 p. 9).

  3. Some German firms as Siemens and EON moved a part of their pension liabilities and a corresponding amount of financial assets into a separate fund and by doing so partly adopted a regime for the funding of pension liabilities similar to the one in the US and the UK. As there is no funding of the firm, the outsourced part of the pension liability is not debt of the firm.

  4. The wage substitution is not directly observable. Any assumption of a wage substitution lower than 100 % makes it difficult to estimate the implied costs of the pension reserve. The remaining part of the service cost not covered by substituted cash wage is an additional cost of the firm, being interpreted as a discount on the employee´s credit´s nominal value (see Schwetzler 2003b pp. 425).

  5. If the firm adopts US GAAP, then consistency would again require a differentiation depending on the multiple´s definition. As the interest costs are treated as labour costs and thus deducted as part of the COGS, pension reserves consistency requirement would be comparable to the accounts payable case.

  6. A notable exception in the study of Schreiner and Spremann (2007) is the multiple based on sales: here trailing multiples outperform forward ones (see Schreiner and Spremann 2007 p. 19).

  7. See the overview of Dittmann and Maug (2008). The authors provide empirical evidence on highly skewed percentage error distributions, whereas log-scaled errors seem to be much more symmetrically distributed.

  8. E.g. using percentage errors allows for maximum negative deviations of—100 %, whereas there is no upper limit for positive deviations. See 4.2 for a discussion.

  9. The cut off day for data collection was 21st May 2012.

  10. In the scope of this study, EBITDA and EBIT do not have a meaningful economic interpretation for financial firms, and thus they should not be part of the sample. Financial firms comprise banks, insurances, real estate and financial service companies.

  11. We analyze the impact of consistency by adapting different EV definitions on given earnings definitions taken from Datastream. Concentrating on the consistency requirement of properly matching numerator and denominator of multiples our study does not analyze the impact of different earnings adjustments and definitions on valuation accuracy. We leave this analysis to future research.

  12. A categorization of peer groups based on 4-digit ICB codes would reduce the total number of firm year observations by about 30 %.

  13. The majority of firm years (83 %) have their financial year end at 31st December.

  14. 88 days is the median of the difference between reporting day and financial year end of the sample.

  15. EV02/EBITDA and EV02/EBIT both have the lowest median error.

  16. If we analyze, for example, the impact of the inclusion of accounts payables in the net debt definition we compare EV01/sales with EV02/sales, EV03/sales with EV04/sales etc. and check which net debt definitions lead to smaller percentage errors.

  17. As this question is not at the heart of our research question, we like to leave the deeper exploration to further research. Regression results are available from the authors on request.


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Correspondence to Bernhard Schwetzler.

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Chullen, A., Kaltenbrunner, H. & Schwetzler, B. Does consistency improve accuracy in multiple—based valuation?. J Bus Econ 85, 635–662 (2015).

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