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Who Is My Peer? A Valuation‐Based Approach to the Selection of Comparable Firms

Who Is My Peer? A Valuation‐Based Approach to the Selection of Comparable Firms This study presents a general approach for selecting comparable firms in market‐based research and equity valuation. Guided by valuation theory, we develop a “warranted multiple” for each firm, and identify peer firms as those having the closest warranted multiple. We test this approach by examining the efficacy of the selected comparable firms in predicting future (one‐ to three‐year‐ahead) enterprise‐value‐to‐sales and price‐to‐book ratios. Our tests encompass the general universe of stocks as well as a sub‐population of so‐called “new economy” stocks. We conclude that comparable firms selected in this manner offer sharp improvements over comparable firms selected on the basis of other techniques. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting Research Wiley

Who Is My Peer? A Valuation‐Based Approach to the Selection of Comparable Firms

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References (1)

Publisher
Wiley
Copyright
University of Chicago on behalf of the Institute of Professional Accounting, 2002
ISSN
0021-8456
eISSN
1475-679X
DOI
10.1111/1475-679X.00054
Publisher site
See Article on Publisher Site

Abstract

This study presents a general approach for selecting comparable firms in market‐based research and equity valuation. Guided by valuation theory, we develop a “warranted multiple” for each firm, and identify peer firms as those having the closest warranted multiple. We test this approach by examining the efficacy of the selected comparable firms in predicting future (one‐ to three‐year‐ahead) enterprise‐value‐to‐sales and price‐to‐book ratios. Our tests encompass the general universe of stocks as well as a sub‐population of so‐called “new economy” stocks. We conclude that comparable firms selected in this manner offer sharp improvements over comparable firms selected on the basis of other techniques.

Journal

Journal of Accounting ResearchWiley

Published: May 1, 2002

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