Valuation accuracy: an empirical study of price- earnings ratio (per), price-book ratio (pbr) and combined per and pbr benchmark multiples in Malaysia

Zainul Abidin, Nor Shuhada (2008) Valuation accuracy: an empirical study of price- earnings ratio (per), price-book ratio (pbr) and combined per and pbr benchmark multiples in Malaysia. Masters thesis, University of Malaya.

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There are three types of valuation models, namely Direct Valuation, Relative Valuation, and Contingent Claim Valuation. The study focuses on Relative Valuation as one of the valuation methods commonly used by financial analysts due to its simplicity approach. In addition to this, valuation accuracy is one of the crucial elements in valuation models. It is the foundation in making important financial decisions such as Mergers and Acquisitions (M&A), Initial Public Offering (IPO), divestitures, restructuring, going private and liquidation of firms. Due to the significance of valuation accuracies, this paper empirically investigates the relative valuation accuracy models of Price-earnings Ratio (PER), Price-book Ratio (PBR), and combined PER and PBR of Main Board companies in the Kuala Lumpur Stock Exchange (KLSE) market. This paper studies three important information. It investigates the performance of 1) PER, PBR and combined PER and PBR, 2) Average, Median and Simple Harmonic methods and 3) Industry, Market+Total Asset (TA), Market+Return on Equity (ROE), Industry+TA, and Industry+ROE. The research investigates the Main Board companies of Bursa Malaysia from 2005 to 2007. Out of 1931 companies of the Main Board of Bursa Malaysia from 2005 to 2007, 641 companies are dropped from this study due to insufficient financial information and negative earnings data. Financial information from the remaining firms of 1290 are used as the secondary data. The sample firms for this valuation accuracy study are the Kuala Lumpur Composite Index (KLCI) companies from 2005 to 2007. The research finds that the Median method is the most accurate method to be used for PER and combined PER and PBR multiples only, while the Average method ranked the first for PBR multiple. The results also suggest that Industry+ROE is the most accurate selection criteria compared to 1) Industry 2) Market+TA 3) Market+ROE 4) Industry+TA for Average and Median methods. This implies that factors from the comparable firms of ROE within the industry category do complement each other. Thus, giving a better accuracy compared to the other selection criteria. Another results indicate that the combined PER and PBR is the most accurate relative valuation, followed by PER and PBR for Average, Median and Simple Harmonic methods. These results imply that earnings are more important than book value based on our three years sample firms, and that both earnings and book value are value relevant, one does not substitute perfectly for the other.

Item Type: Thesis (Masters)
Uncontrolled Keywords: Valuation accuracy, Relative Valuation, Valuation models, Price-earnings Ratio (PER), Price-book Ratio (PBR), Combined PER, Kuala Lumpur Stock Exchange
Subjects: H Social Sciences > HG Finance
Date Deposited: 23 Jul 2013 04:02
Last Modified: 23 Jul 2013 04:02

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