Open AccessDO FUNDAMENTALS DRIVE RELATIVE VALUATION? EVIDENCE FROM GLOBAL STOCK MARKET INDICES
Author(s) -
Komla Agudze,
Oyakhilome Ibhagui
Publication year - 2020
Publication title -
journal of financial management markets and institutions
Language(s) - English
Resource type - Journals
ISSN - 2282-717X
DOI - 10.1142/s2282717x20500024
Subject(s) - multiple , valuation (finance) , economics , econometrics , stock (firearms) , relative value , stock market , market value , financial economics , accounting , mathematics , finance , geography , context (archaeology) , arithmetic , archaeology
In this paper, we use aggregate-level data from global, developed and emerging markets to empirically examine how fundamentals of publicly listed firms drive their relative valuation multiples. First, we find that, in each market, there is a dynamic link between fundamentals and relative valuation: relative valuation multiples are negatively linked to their past, suggesting that overvalued markets, based on high relative valuation multiples, often experience corrections that subsequently lower their relative valuation multiples, making them less overvalued, fairly valued or even undervalued, compared with previous periods. Secondly, we document that fundamentals do indeed have significant effects on relative valuation multiples. This reveals that fundamentals are an important driver of relative valuation multiples at the aggregate level in the stock market. Hence, practitioners should not ignore outlook for relative valuation multiples of aggregate stock market that is deduced from fundamentals.