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Stick to the Fundamentals and Discover Your Peers

Financial analysts journal, 2017-01, Vol.73 (3), p.85-105 [Peer Reviewed Journal]

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Title:
Stick to the Fundamentals and Discover Your Peers
Author: Knudsen, Jens Overgaard ; Kold, Simon ; Plenborg, Thomas
Subjects: Accuracy ; Approaches ; Classification ; Corporate profits ; Dividends ; Equity ; Estimates ; Financial leverage ; Growth rate ; Peers ; Profitability ; Studies ; Valuation
Is Part Of: Financial analysts journal, 2017-01, Vol.73 (3), p.85-105
Description: The use of industry as a criterion for selecting peers for multiples-based valuation rests on the notion that companies operating in the same industry are more likely to share fundamental value drivers (i.e., profitability, growth, and risk). However, such companies may not have similar characteristics in terms of these drivers and thus should not be traded at the same multiple. We analyze this issue by developing the sum of absolute rank differences (SARD) approach. The SARD approach can account for an infinite number of proxies for profitability, growth, and risk while remaining independent of industry classifications. Our results indicate that the SARD approach yields significantly more accurate valuation estimates than the industry classification approach.
Publisher: Charlottesville: CFA Institute
Language: English
Identifier: ISSN: 0015-198X
EISSN: 1938-3312
DOI: 10.2469/faj.v73.n3.5
Source: ProQuest Central

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