On the Importance of Asset Pricing Factors in the Relative Valuation

This paper discusses the importance of the pricing factors and multi-factor asset pricing models in the relative valuation approach in corporate valuation. We examine the valuation performance of multiples estimated in regressions with pricing factor variables, and we compare it to the performance of multiples based on cross-section, industry, or risk group averages. The analysis shows the effect of the pricing factor variables on the average values of multiples. The estimation of multiples in regressions with eight-factor variables yields the smallest estimation errors. Moreover, the estimated multiples in regressions with pricing factor variables consistently outperform the cross-section, industry, and risk-based multiples. The higher estimation accuracy of multiples increases the estimation accuracy of stock values based on the relative valuation