New Evidence on the Relation between the Enterprise Multiple and Average Stock Returns
Practitioners increasingly use the enterprise multiple (EM) as a valuation measure. EM is (equity value + debt + preferred stock – cash) / (EBITDA). We document that EM is a strong determinant of stock returns. Following Fama and French (1993) and Chen, Novy-Marx, and Zhang (2010), we create an EM factor that generates a return premium of 5.28% per year. We interpret EM as a proxy for the discount rate. Firms with low EM values appear to have higher discount rates and higher subsequent stock returns than firms with high EM values.
Year of publication: |
2012
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Authors: | Loughran, Tim ; Wellman, Jay W. |
Published in: |
Journal of Financial and Quantitative Analysis. - Cambridge University Press. - Vol. 46.2012, 06, p. 1629-1650
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Publisher: |
Cambridge University Press |
Description of contents: | Abstract [journals.cambridge.org] |
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