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Journal of Financial and Quantitative Analysis Vol. 46 No. 6 2011

New Evidence on the Relation between the Enterprise Multiple and Average Stock Returns

Tim Loughran1,2; Jay W. Wellman3

1 University of Mendoza · 2 University of Notre Dame · 3 Cornell University

Abstract

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.

DOI
10.1017/s0022109011000445
Volume
46
Issue
6
Pages
1629-1650
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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