Study On Valuation Accuracy Of The Relative Comparison Valuation Method Based On Growth Perspective

The relative comparison valuation method based on Efficient CapitalMarkets Theory is widely used because it is relatively simple to calculate, as wellas easy to use and understand in practice. However, it has been questioned for lackof standards of selection of comparable companies. How to overcome its "shortboard" and improve its valuation accuracy, foreign scholars achieved some resultsin1990s, since the theoretical research has been stagnant in this field. Butimproving standards of selection of comparable companies to improve itsvaluation accuracy has a strong value to practitioners, this paper tries to prove thatstandards based on growth perspective of selection of comparable companieshelps to improve valuation accuracy.Firstly, this paper conducts literature review from selection of comparablecompanies and price multiples as two key factors to relative comparison valuationmethod, At the same time, this paper elaborates the relevant literature of thebusiness growth from multiple angles, and conducts literature review on thetheory development of the relative comparison valuation method and the businessgrowth.Secondly, this paper has a summarization on the relative comparisonvaluation method and the Efficient Capital Markets Theory, and borrows theresults of previous research that our country is weak-form efficient capital markets,as well as leading to the topic of this paper by the analysis on close relationshipbetween the relative comparison valuation method and the businessgrowth.Followed by an example of listed companies in the pharmaceuticalindustry, assuming a stock price as the explained variable and the influencingfactors of enterprise value as explanatory variables, wesets up linear regressionmodelto verify feasibility of application to the relative comparison valuationmethod in chinese capital market.Finally, in order to prove valuation accuracy using standard based growthperspective being better than the current standard, this part conducts comparativeanalysis by the way to progressive layers. The first step, conducting descriptivestatistical analysis on price to earnings, price to book value and price to sales of selected listed companies in the pharmaceutical industry finds that the pricemultiples of sample distribution in the pharmaceutical industry are very uneven,not directly using its averagesas a valuation basis; The second step, selected listedcompanies with current standards including single standard and double standardsare subdivided into five categories using factor analysis and cluster analysis, thedistribution of the number of companies are extremely uneven, indicating that thecurrent standards should not be used directly as a selection standard;Thethirdstep,selected listed companies are subdivided into five categories based growthperspective using factor analysis and cluster analysis, and the results are verysatisfactory;The fourth step is toselect six samples companiesto test the valuationaccuracy.Theresultsshows that selectingcomparable companieswith a singlestandard results in an average error of the target company reaching14.55%,selecting comparable companieswith double standards results in anaverage error of the target company reaching15.32%,selecting comparablecompanies with a standard based growth perspective results in an average error ofthe target company reaching only3.88%, therefore, we draw that selectingcomparable companies on the basis of classification the pharmaceutical industrywith a standard based growth perspective can improve greatly the valuationaccuracy of the relative comparison valuation method.