Cheng, C.S. Agnes, and McNamara, Ray (2000) The valuation accuracy of the price-earnings and price-book benchmark valuation methods. Review of Quantitative Finance and Accounting, 15 (4). pp. 349-370.

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Abstract

This paper evaluates the valuation accuracy of the price-earnings (P/E), the price-book (P/B) and a combined price-earnings and price-book (P/E-P/B) benchmark valuation methods. Performance of the benchmark valuation methods relies on the definition of comparable firms. In this paper, comparable firms are selected based on industry membership, size and return on equity as well as combinations of industry membership with size and with return on equity. We find that within the P/E and P/B benchmark valuation methods, the best definition of the comparable firms are based on industry membership combined with return on equity. However, only the industry membership is necessary to define the comparable firms for the combined P/E-P/B method. In sum, the results suggest that, when firm's value is unknown, the combined P/E-P/B valuation approach selecting comparable firms based on industry membership performs the best among all the approaches evaluated in this paper.

We also find that the P/E benchmark valuation method performs better than the P/B benchmark valuation method and the combined method outperforms either the P/E or the P/B method. These results imply that earnings are more important than book value as a single-number firm valuator over our sample years (from 1973 to 1992) and that both earnings and book values are value relevant, one does not substitute perfectly for the other.

Item ID:	36285
Item Type:	Article (Research - C1)
ISSN:	1573-7179
Keywords:	accounting, price-earnings, price-book, firm valuation
Date Deposited:	30 Sep 2016 02:24
FoR Codes:	15 COMMERCE, MANAGEMENT, TOURISM AND SERVICES > 1501 Accounting, Auditing and Accountability > 150103 Financial Accounting @ 100%
SEO Codes:	90 COMMERCIAL SERVICES AND TOURISM > 9001 Financial Services > 900101 Finance Services @ 100%
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