Assessing Relative Valuation in Equity Markets (eBook)

Emanuele Rossi is Associate Professor of Corporate Finance at the University of Milan-Bicocca, Italy. He has previously held various positions in other Italian business schools and universities. His main research interests are: corporate finance, financial markets, business valuation, SMEs and entrepreneurial finance.- Gianfranco Forte is tenured Assistant Professor of Investment at the University of Milan-Bicocca, Italy,  and adjunct professor of Finance at Bocconi University, Italy. He is advisor for several financial institutions and funds on risk and asset management field. His main research interests are: financial market anomalies, advanced asset management, portfolio management, risk management.

Acknowledgements 6
Contents 8
List of Abbreviations 10
List of Figures 12
List of Tables and Appendices 14
Chapter 1: Introduction 16
Reference 19
Chapter 2: Relative Valuation: Issues and General Framework 20
2.1 Relative Valuation Versus Absolute Valuation 20
2.2 Stock Market Multiples: Theoretical Foundations 23
2.2.1 Fundamental Derivation of Multiples 24
2.2.2 Inefficient Capital Market and Multiples 29
2.3 Multiples Selection and Relevant Value Driver Measures 32
Notes 38
References 39
Chapter 3: Literature Background 41
3.1 General Overview 41
3.2 Previous Empirical Research Findings 43
3.2.1 Identification of Comparable Firms 46
3.2.2 Market Multiples and Value Investing 49
3.2.3 Combination of Multiples 52
Notes 55
References 56
Chapter 4: Accuracy Performance of Relative Valuation 59
4.1 The Original Dataset 60
4.2 Methodology 62
4.2.1 Design of the Empirical Study 62
4.2.2 Definition of Pricing Errors 71
4.3 Main Findings 72
4.3.1 Accuracy Performance at Aggregate Level 72
4.3.2 Accuracy Performance Across Multiple Type 80
4.3.3 Accuracy Performance Across Sectors and Industry Groups 84
4.3.4 Accuracy Performance Across Time 98
Notes 101
References 103
Chapter 5: A Portfolio Approach: Multiples’ Accuracy and Stock Selection 104
5.1 Active Portfolio Management: A Premise 105
5.2 Dataset and Methodology 106
5.2.1 Addressing the Illiquid and Less Frequently Traded Stocks Issue 106
5.2.2 Stock Selection and Identifying Relevant Screening Factors 107
5.3 Investment Strategies Based on Pricing Errors Factor 108
5.4 Main Findings 111
5.5 Concluding Remarks 119
Notes 121
References 125
Chapter 6: Conclusion 127
Appendices 132
Index 185