Multiples and future returns : an investigation of pricing multiples’ ability to predict abnormal returns on the Oslo Stock Exchange

摘要

The purpose of this master thesis is to investigate the relationship between pricing multiplesand future abnormal returns. An important part of the thesis is to find out whether a strategyusing multiples as a selection tool can yield positive abnormal returns.We analyse all available companies on the Oslo Stock Exchange in the period 2000-2015.Using the method introduced by Fama-MacBeth and a portfolio approach, we investigate sixdifferent multiples: EV/EBITDA, EV/EBIT, EV/FCFF, P/E, P/FCFE and P/B.During the whole period, only EV/FCFF seems to predict abnormal returns. This result is verysurprising. Almost all studies find that EV/EBITDA, EV/EBIT, P/E and P/B predict abnormalreturns. In search of an explanation of this surprising result, we divided the whole period(2000-2015) into two sub-periods, one period before the start of the financial crisis in 2008and one period after.During the first sub-period (2000-2008), the results are closer to our expectations and more inline with prior research. In this period, EV/EBITDA, EV/EBIT, EV/FCFF and P/E seem topredict abnormal returns. A lower multiple was associated with higher abnormal returns.During the last sub-period (2008-2015), none of the multiples seems to predict abnormalreturns. These results are quite astonishing. It is an established truth in finance that value stocks(low multiples) provide positive abnormal returns.We believe that the decrease in the risk-free interest rate from normal to record low levels afterthe financial crisis offers the best explanation of the surprising results. Holding all othervariables constant, we show that growth stocks (high multiples) should outperform valuestocks (low multiples) in this environment, as growth stocks are more sensitive to changes inthe cost of capital.