Optimal equity valuation using multiples: The number of comparable firms
Journal
European Financial Management
Date Issued
January 1, 2022
Author(s)
DOI
10.1111/eufm.12405
Abstract
We examine how the accuracy of a multiples-based valuation changes as the number of comparable firms used to estimate the valuation multiple increases. Our research is motivated by a contrast between the approach followed by practitioners, who typically use a small number of closely comparable firms, and the academic literature which often uses all firms in an industry. Using a simple selection rule based on growth rates, we find that using 10 closely comparable firms is as accurate on average as using the entire cross-section of firms in an industry. The loss of accuracy from using five comparable firms rather than 10 firms or the entire industry is not great.