Relative valuation: a study of price/earnings and price/book valuation accuracies in Malaysia

Nordin, Nazleen Azwa (2008) Relative valuation: a study of price/earnings and price/book valuation accuracies in Malaysia. Masters thesis, University of Malaya.

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This research is motivated by the importance of valuation accuracy when valuing firms or equity. The study specifically focuses on relative valuation as one of the valuation methods commonly used by financial analysts due to its simplistic approach. In addition to being adoptable, in valuation, accuracy is vital because the determination of value is the foundation in making important financial decisions such as acquisitions and investments. Therefore, it is imperative that any valuation method being utilized by practitioners exhibits such attributes. Due to the significance of valuation accuracies, this study attempts to investigate the accuracies of relative valuation method with emphasis on Price/Earning and Price/Book multiples that are commonly used in the method. More specifically, this research also examines the valuation accuracies of the combination of Price/Earning and Price/Book multiples in relative valuation method. In this study, the multiples are combined by applying weights to analyze their impacts on achieving accuracy. The accuracy of relative valuation method for different basis of selection criteria of comparable firms is also evaluated. The selection of comparable firms are defined based on industry category, total assets, return on equity, the combination of industry category with total assets and the combination of industry category with return on equity. The research utilizes secondary data extracted from Bursa Malaysia database to capture financial information of 495 companies listed on the Main Board of Bursa Malaysia. The sample size for studying valuation accuracies is 76 firms, based on their 2007 financial data. These target firms are valued based on the valuations of their comparable companies using the relative valuation method. The results of the research indicate that valuation accuracies improve when weighted average is applied to the combination of Price/Earnings and Price/Book valuation method. The research also finds that the optimal weight that gives greater valuation accuracy is by applying 90% weights to Price/Earnings and 10% weights to Price/Book multiple. The results also suggest that return on equity may be an important selection criterion when selecting comparable companies for valuing target firm.

Item Type: Thesis (Masters)
Uncontrolled Keywords: Relative valuation, Price/Earning, Price/Book
Subjects: H Social Sciences > HG Finance
Date Deposited: 23 Jul 2013 06:29
Last Modified: 23 Jul 2013 06:29

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