Quality of investment recommendation – evidence from polish capital market, multiples approach

Abstract

The aim of the paper is to assess the quality of practices used in the multiples approach in investment recommendations. A hundred investment recommendations were examined, coming from seven different brokerage houses, issued in year 2016. The results suggest that the cognitive value of the multiples valuation in the recommendations is very limited. In a statistically significant way, the results of multiples valuation do not differ significantly from the results obtained using the income method. In the majority of analyzed reports, multiples based valuation method has a direct impact on the final value of the shares resulting from the recommendation. Most reports use a multi-stage procedure, in which the valuations resulting from multiples were subject to subsequent transformations that can lead to the possibility of manipulating valuation results. The range of the applied multiples is very poor, in almost all cases P/E and EV/EBITDA measures are used, other multiples are used incidentally. On average, the valuations are based on about ten comparable firms, however the multiples have broad dispersion. The scope of disclosures in the area of multiples valuation is marginal and certainly insufficient. There is no information on the method of selecting both multiples, comparable companies and often very different transformations made on the input data. There is no justification that would ensure the objectivity of the proceedings.