SSE/EFI Working Paper Series in Business Administration
P/E-ratios in Relative Valuation - a Mission Impossible?
() and Stina Skogsvik
Abstract: Relative P/E-ratio valuation apparently still plays an
important role among investment research analysts and advisors (cf. Goldman
Sachs,1999). In a valuation model of this kind, the value of owners´equity
is typically calculated as a function of an observed P/E-ratio for some
peer company, or the mean/median P/E-ratio for some group of peer
companies. The research question being addressed in the paper is concerned
with the validity of a benchmark P/E-ratio being assessed in this way.
Assuming that there is only one peer company, the importance of differences
(between the company being valued and its peer company) with regard to the
book return on owners´equity and the growth of owners´equity have been
investigated. In the main, it is shown that relative P/E-ratio valuation
will not be able to handle differences in the expected book return or
growth of owners´equity. In an empirical context, however, controlling for
industry and the expected book return for next year, together with some
modification of the valuation model itself, can improve the quality of
earnings-based relative valuation.
Keywords: equity valuation; financial statement analysis; P/E-ratio; relative valuation; valuation modelling; (follow links to similar papers)
JEL-Codes: G12; M41; (follow links to similar papers)
29 pages, April 30, 2001
- This paper is published as:
Skogsvik, Kenth and Stina Skogsvik, (2008), 'P/E-ratios in Relative Valuation - a Mission Impossible?', Investment Management and Financial Innovations, Vol. 5, No. 4 (continued), pages 237-248
Questions (including download problems) about the papers in this series should be directed to Helena Lundin ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Design by Joakim Ekebom