Peer group benchmarking

Michael Lauritz Møhl

Studenteropgave: Kandidatafhandlinger


This master thesis was motivated by the ongoing debate relating to application of relative benchmarking. It brings light to the most commonly applied valuation tool; Peer Group Benchmarking (PGB). The thesis´ investigation moves from describing the preferences in the industry, found from questionnaires, through theoretical recommendations to a final empirical analysis, which evaluates and compare the two former. Initially, the thesis describes the valuation models applied on the Danish stock market, it pins down the input characteristics, strengths and weaknesses and finally their popularity among analysts. Subsequently, the thesis presents two cases of Peer Group models from an investment bank. It shows that the models constructed for PGB are heavily dependent on preferences of the analyst, company specifications and externalities to the company under speculation, referred to as the target company. Furthermore, the thesis provides an in debt analysis of the analysts preferences and interpretations of PGB. It is the impression that analysts on the Danish stock market apply PGB very other to forecast fundamentals or as a valuation model. The tendencies manifest that analysts choose peers solely from similarities in the industries in which they operate. The theoretical point of view is obtained from Sanjeev Bhojraj and Charles M. C. Lee in “Who is my peer”, which is considered the most relevant article to this thesis. The authors recommend the selection of peers based on similarities in the financial characteristics which drives a certain multiple or fundamental. This is in steep contrast to the findings from questionnaires, and thus the following two hypotheses regarding PGB is constructed to take out the empirical analysis. Hypothesis 1) “PGB is an inefficient tool in valuating Danish companies” and 2) “Choosing companies based solely on similarities in the industry in which the target company operates is an inefficient approach to forecasting fundamentals and valuating companies with PGB. The empirical investigation generally rejects hypothesis 1) which is against prior expectations. PGB show good visual similarities and correlation between Danish target companies and different constructed PG´s. General uncertainty is acknowledge as high due to the fact that data stems from the past 20 years and that peers and target companies´ developments in the financial statements can occur from one-off gains/losses and thus bias the results. Hypothesis 2) is accepted in two stages of the analysis, both when dealing with forecasting of fundamentals and valuating directly with PGB. Valuating Danish companies through PG´s that contain firms solely picked from similarities in industries is not expected to be accurate. The findings supported the statements of the theoretical recommendations as PG´s constructed with peers based on similarities in the fundamentals showed equally good results as the former. Overall, the thesis brings light to a niche within valuation tools and presents the trends of application on the Danish stock market. It analyses and explains various extends of PGB and compares theoretical recommendations with the actual applications found from questionnaires. Finally, it evaluates the concepts overall and extend to which it works most efficiently/least inefficiently.

UddannelserCand.merc.aef Applied Economics and Finance, (Kandidatuddannelse) Afsluttende afhandling
Antal sider110