Choosing Comparable Firms in Europe: An Empirical Study of the Ability of the SARD Approach and the Industry Approach to Find Peers in Multiple Valuation

Lukas Erik Mogens Pedersen & Michael Mollerup Laigaard

Student thesis: Master thesis


In the economic literature regarding multiple valuations, a discussion has arisen of how one should choose comparable peers. The methods of how to choose comparable peers can be split into two schools of thoughts. One school believes that peers should be found within a firm’s industry, and the other school believes that peers should be chosen based on comparability in fundamentals. By basing this paper on the sum of absolute rank differences (SARD) approach as well as the industry approach, the question of how one should choose comparable peers in the European market will be answered. This paper defines the European market as the 600 largest European companies contained in the Euro STOXX 600 index, and the data used is from the period 2000-2019. It is first found that a combination of the original SARD approach and the industry yields more precise valuations than does the SARD approach and the industry approach separately. Later in the paper, it is found that one can substitute the used fundamentals from the original SARD approach with fundamentals based on enterprise value rather than equity value. This will generally lead to more comparable firms than found by the SARD approach with the original fundamentals and thereby lead to more accurate valuations. Finally, it is found that by using the SARD approach within a firm’s industry, the choice of fundamentals should depend on the type of multiple you are using. For this method, it is found that using fundamentals based on enterprise value leads to the most accurate valuations for the EV/EBIT and EV/Sales multiples. The use of equity fundamentals leads to more accurate valuations in the first levels of the SARD method within the same industry for the P/B and P/E multiples, which is not the case in the later levels where the choice of fundamentals does not matter. This paper, therefore, concludes that the most accurate multiple valuations in Europe are found when peers are selected based on a combination of fundamentals and a firm's industry. To further enhance the accuracy of this method, the choice of fundamentals should match the choice of multiple

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2021
Number of pages115