Connect with us

Global Banking and Finance Review is an online platform offering news, analysis, and opinion on the latest trends, developments, and innovations in the banking and finance industry worldwide. The platform covers a diverse range of topics, including banking, insurance, investment, wealth management, fintech, and regulatory issues. The website publishes news, press releases, opinion and advertorials on various financial organizations, products and services which are commissioned from various Companies, Organizations, PR agencies, Bloggers etc. These commissioned articles are commercial in nature. This is not to be considered as financial advice and should be considered only for information purposes. It does not reflect the views or opinion of our website and is not to be considered an endorsement or a recommendation. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third-party websites, affiliate sales networks, and to our advertising partners websites. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish advertised or sponsored articles or links, you may consider all articles or links hosted on our site as a commercial article placement. We will not be responsible for any loss you may suffer as a result of any omission or inaccuracy on the website. .

Top Stories

Using comparable firms is a standard method among equity analysts and investment advisors to estimate the value of firms and make investment recommendations


How peers are chosen makes a critical difference to valuations and decision-making. Research highlights the importance of selecting economically similar peers but one important area which has been overlooked is the impact of different accounting methods on peer choice: different accounting practices can make economically similar firms appear different and economically different firms appear similar.Professor-Steven-Young

The approach using comparables presents the value of firms as the product of a ‘value driver’, such as earnings, and the corresponding pricing multiple derived from a set of peer firms. The method involves the following three steps: identify the most appropriate value driver; select comparable firms and average their pricing multiple using the identified value driver, and then apply the resulting average comparable firm multiple to the value driver of the firm being valued – the ‘target’ firm. Multiples based on forward earnings have been found to produce the most accurate value estimates.

At the heart of the multiples method is the identification of comparable firms used for estimating the unobservable pricing multiple of the target firm. Research demonstrates that valuation accuracy is increasing in the degree of economic comparability between the target firm and its peer set. For example, matching by growth, or a combination of risk and growth, leads to more accurate value estimates than selecting peer firms randomly when valuing firms using a price-earnings multiple.

The impact of accounting policies on comparability and peer selection is a much less well-understood factor. In our research we have used data on firms from 15 European Union (EU) countries over the period 1997 through 2008 to test the extent to which changes in financial reporting comparability (e.g., as a consequence of adopting International Financial Reporting Standards) affect valuation accuracy. . We use an international sample of firms because accounting diversity (and changes therein) is more pronounced across countries than within a single country. Our method involves selecting peer firms from the entire cross-section of foreign firms. All else equal, we expect foreign peer selection and valuation accuracy to improve as international accounting practices converge. Our first set of tests examines whether the valuation accuracy of pricing multiples based on foreign comparable firms has increased over our sample period in line with efforts to harmonize financial reporting practices within the EU. We find evidence of a pronounced decline in average valuation errors from a market-to-book pricing multiple over the sample period: errors decline by two percent per year and the average error is between 13 percent and 16 percent lower in the latter part of the sample period. We find very similar results when the analysis is repeated using the enterprise value-to-sales multiple.

Further analysis reveals that the increase in valuation accuracy over time is driven by improvements in the economic comparability of selected peers, as measured by their risk (beta), expected growth (long-term consensus earnings forecast from IBES), and by sector grouping (two-digit SIC code). We also found that using peers selected at an earlier time point to value the same target firm at a later date led to relatively inaccurate value estimates whereas the reverse wasn’t true. Finally, we linked changes in valuation accuracy directly to convergence in accounting practices. We chose peer firms using accounting data that has been standardised to remove international differences in reporting methods and compared the resulting valuation errors with corresponding errors for peers selected using as-reported data. We find that using as-reported data to select peers results in less accurate valuations relative to using adjusted data when international divergence in accounting practices is high but that this difference disappears as cross-country reporting alignment improves. Collectively, these results suggest that improvements in accounting comparability are associated with better valuation accuracy.

We provided further evidence on the link between accounting comparability and peer-based valuation accuracy by examining the change in valuation errors surrounding mandatory adoption of International Financial Reporting Standards (IFRS) by EU firms in 2005. Research suggests that the level of cross-border accounting comparability increased significantly in response to the EU’s IFRS mandate and associated enforcement changes. All else being equal, the transition to IFRS should therefore lead to direct improvement in foreign peer-based valuation accuracy. Our results show that mandatory IFRS adoption was associated with significantly better peer selection and greater valuation accuracy for the subset of firms characterized by internationally diverse financial reporting practices before 2005. This evidence provides further support for the predicted positive link between accounting comparability and the accuracy of valuations derived from pricing multiples.

Regulators, investors, and accounting practitioners frequently attribute the financial statement analysis gains to enhanced accounting comparability, particularly in an international context. Comparable financial reporting is predicted to improve investors’ ability to compare financial results across reporting entities. Our research explores these claims. We document material financial statement analysis benefits of improved accounting harmonization in the form of improved peer selection. Although the study has not looked for evidence on analysts’ actual peer selection decisions and valuation model choices, our findings are nevertheless very relevant. For example, while improvement in the comparability of published accounting data may not change analysts’ actual peer firm selections, it likely cuts the cost of financial analysis by reducing the need to adjust reported data when comparing financial outcomes. This in turn could have implications for the reliance analysts and investors are willing to place on peer-based valuation relative to alternative valuation approaches.

Professor Steve Young, Lancaster University Management School. The paper on which the article is based is available in electronic form at



Global Banking & Finance Review


Why waste money on news and opinions when you can access them for free?

Take advantage of our newsletter subscription and stay informed on the go!

By submitting this form, you are consenting to receive marketing emails from: Global Banking & Finance Review │ Banking │ Finance │ Technology. You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact

Recent Post