Appendices Hereafter, the following appendices are presented:

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Appendices

Hereafter, the following appendices are presented:

• Appendix #1: Determination of the Value Drivers

• Appendix #2: Data Collected from Datastream with their Mnemonic and their

Source.

• Appendix #3: Descriptive Statistics

• Appendix #4: Results from the Misvaluation Hypothesis

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Appendix #1: Determination of the Value Drivers

PE ratio:

The value of equity for a stable firm, using the Gordon growth model presented by Ross

et al. (2005) is:

g

k

DIV

P

e

−

=

1 0

,

(1)

where P

0

is the current share price, DIV

1

is the expected dividend per share, g is the

(constant) growth rate and k

e

is the cost of equity.

Given that:

POUT

EPS

DIV

=

×

,

and

(2)

⎟

⎠

⎞

⎜

⎝

⎛ −

=

ROE

g

POUT

1 ,

(3)

where EPS are the earnings per share, POUT is the dividend payout ratio and ROE is the

return on equity.

Formula 1 can be rewritten as the PE ratio:

g

k

ROE

g

EPS

P

e

−

⎟

⎠

⎞

⎜

⎝

⎛ −

=

1

0 0

_.

₍₄₎

PB ratio:

The PB ratio starts with the same identity as the PE (formula 1). The earnings per share

can be defined as:

B

ROE

EPS

=

×

,

(5)

where B is the book value of equity.

When inserting formula 2 and 5 in formula 1, the value of equity can be rewritten as:

(3)

If the return on equity is based upon expected earnings in the next time period, this

function can be simplified to:

g

k

POUT

ROE

B

P

e

−

×

=

1 1 0 0

_.

₍₈₎

Inserting function 3 in the function 8 results in the identity:

g

k

g

ROE

B

P

e

−

=

1 0 0

_.

₍₉₎

EVE ratio:

To create the EVE multiple, start with the key value driver formula, presented by Koller

et al. (2005):

g

WACC

ROIC

g

NOPLAT

V

T

−

⎟

⎠

⎞

⎜

⎝

⎛ −

=

1

,

(10)

where NOPLAT are the net operating profits less adjusted taxes, ROIC is the return on

invested capital and WACC is the weighted average cost of capital.

NOPLAT can be written as:

(

T

)

EBITA

NOPLAT

_T₌₁

=

×

1 −

,

(11)

where, EBITA are the earnings before interest, taxes and T is the tax rate.

Solving formula 10 for NOPLAT:

(

)

g

WACC

ROIC

g

T

EBITA

V

−

⎟

⎠

⎞

⎜

⎝

⎛ −

×

−

×

=

1

1 .

(12)

Divide both sides by EBITA, gives the enterprise-value-to-EBITA multiples:

(

)

g

WACC

ROIC

g

T

EBITA

V

−

⎟

⎠

⎞

⎜

⎝

⎛ −

×

−

=

1

1 .

(13)

(4)

EVB ratio:

To determine the EVB ratio, the PB ratio, given by formula 9, can be rewritten, using

enterprise valued, as:

1 1

g

WACC

g

ROIC

BDE

V

−

=

.

(14)

Summary

Basically the value drivers of the multiples can be rewritten in a simple form. Formula 4

and 13, the value driver formulas for the PE and EVE ratio, and formulas 9 and 14, the

value driver formulas for the PB and EVB can be rewritten as:

g

k

r

g

e

₋

⎟

⎠

⎞

⎜

⎝

⎛ −

=

1 μ

,

and

(15)

g

k

g

r

b

₋

−

=

μ

,

(16)

where µ

e

is the multiples based on earnings (PE or EVE), µ

b

is the multiple based on

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Appendix #2: Variables with their Datastream Mnemonic and Source.

Table 8

Variables, Datastream Mnemonic and Source

Variable Datastream Mnemonic Source

Common shareholders’ equity X(WC03501) Worldscope

Dividend Yield DY Thompson

EBITDA X(WC18198) Worldscope

Enterprise value X(WC18100) Worldscope

Net Income X(WC01751) Worldscope

Net Sales X(WC01001) Worldscope

PB ratio PTBV Thompson

PE ratio PE Thompson

Total assets X(WC02999) Worldscope

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Appendix #3: Descriptive Statistics

Table 9

Desprictive Statistics from the Data Gathered from Datastream

PE96 PE97 PE98 PE99 PE00 PE01 PE02 PE03 PE04 PE05 PE06

N 937 1.031 1.185 1.320 1.400 1.524 1.549 1.434 1.485 1.656 1.839 mean 19,41 21,19 22,66 19,89 24,14 21,69 18,99 12,69 19,02 20,46 20,97 median 16,80 18,10 18,90 15,60 16,40 16,40 15,30 10,70 16,00 17,35 18,10 high 55,50 60,70 66,40 65,10 102,30 78,70 62,40 40,70 56,90 59,30 60,20 low 0,00 0,30 0,30 0,10 0,40 0,00 0,10 0,10 0,10 0,10 0,00 st. dev. 10,83 11,87 13,53 13,62 21,01 16,05 12,85 7,81 11,19 11,51 11,55 PB96 PB97 PB98 PB99 PB00 PB01 PB02 PB03 PB04 PB05 PB06 N 1.141 1.246 1.377 1.539 1.694 1.963 2.067 2.094 2.168 2.313 2.522 mean 1,88 2,11 2,31 1,95 2,44 2,13 1,77 1,15 1,83 1,91 2,13 median 1,54 1,68 1,85 1,51 1,63 1,66 1,41 0,97 1,55 1,64 1,81 high 6,03 6,72 7,52 6,73 9,84 6,99 5,50 3,35 5,34 5,48 6,20 low 0,01 0,01 0,18 0,12 0,01 0,01 0,06 0,02 0,00 0,00 0,00 st. dev. 1,24 1,44 1,58 1,40 2,09 1,48 1,13 0,68 1,11 1,12 1,29

EVE96 EVE97 EVE98 EVE99 EVE00 EVE01 EVE02 EVE03 EVE04 EVE05 EVE06

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Table 9

Resumed

EVB96 EVB97 EVB98 EVB99 EVB00 EVB01 EVB02 EVB03 EVB04 EVB05 EVB06

N 1.154 1.313 1.428 1.565 1.830 2.001 2.068 2.118 2.208 2.379 2.557 mean 1,53 1,71 1,66 1,67 1,61 1,26 1,06 1,19 1,35 1,51 1,60 median 1,27 1,42 1,35 1,32 1,26 1,09 0,96 1,06 1,19 1,33 1,42 high 4,52 5,01 5,22 5,52 5,28 3,40 2,67 3,05 3,53 3,97 4,25 low 0,00 0,01 0,01 0,01 0,00 0,00 0,00 0,00 0,01 0,01 0,05 st. dev. 0,89 1,05 1,06 1,11 1,06 0,68 0,52 0,59 0,68 0,76 0,82 G96 G97 G98 G99 G00 G01 G02 G03 G04 G05 G06 N 796 1.149 1.303 1.430 1.554 1.638 1.656 1.473 1.547 1.760 1.962 mean 0,13 0,15 0,18 0,20 0,22 0,21 0,18 0,14 0,13 0,15 0,17 median 0,10 0,12 0,13 0,15 0,17 0,16 0,13 0,11 0,10 0,11 0,13 high 0,47 0,56 0,67 0,73 0,86 0,81 0,66 0,55 0,49 0,57 0,67 low 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 st. dev. 0,11 0,13 0,15 0,17 0,19 0,18 0,15 0,12 0,11 0,13 0,15

BROE96 BROE97 BROE98 BROE99 BROE00 BROE01 BROE02 BROE03 BROE04 BROE05 BROE06

N 1.257 1.438 1.529 1.610 1.668 1.621 1.612 1.754 1.951 2.110 2.219 mean 0,13 0,15 0,15 0,14 0,13 0,12 0,12 0,12 0,12 0,13 0,14 median 0,11 0,13 0,13 0,12 0,12 0,10 0,10 0,10 0,10 0,11 0,12 high 0,44 0,47 0,49 0,46 0,43 0,41 0,44 0,46 0,42 0,44 0,44 low 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 st. dev. 0,10 0,11 0,11 0,10 0,10 0,09 0,09 0,10 0,09 0,10 0,10

BROA96 BROA97 BROA98 BROA99 BROA00 BROA01 BROA02 BROA03 BROA04 BROA05 BROA06

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Table 9

Resumed

DE96 DE97 DE98 DE99 DE00 DE01 DE02 DE03 DE04 DE05 DE06

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Appendix #4: Results from the Misvaluation Hypothesis

Table 10

Results from the OLS and SUR Regressions for the Misvaluation Hypothesis

PE s = 0 2000 2001 2002 2003 2004 2005 2006 SUR Sample Size 1.047 1.141 1.130 877 929 1.129 1.299 2.014 C 24,30 21,48 17,47 14,38 20,67 21,12 21,12 20,36 Coefficient G 25,27 15,86 18,66 0,30 4,50 6,41 8,12 11,23 t-Statistic 7,16*** 5,79*** 7,01*** 0,14 1,44 2,31** 3,70*** 10,57*** Coefficient DE -11,08 -7,26 -2,96 -2,47 -4,05 -3,09 -4,64 -5,27 t-Statistic -9,27*** -7,37*** -4,08*** -5,49*** -6,00*** -4,00*** -5,11*** -16,66*** Coefficient Dummy -5,02 1,40 1,14 0,47 -1,21 0,96 0,34 -0,31 t-Statistic -1,48 0,65 0,60 0,60 -1,38 0,95 0,28 -0,76 R2 _{12,5% 8,1% 5,8% 3,3% 4,2% 2,0% 3,1%}_12.,2% PB s = 0 2000 2001 2002 2003 2004 2005 2006 SUR Sample Size 1.013 1.035 989 872 993 1.201 1.382 2.101 C 1,73 1,59 1,39 1,02 1,29 1,31 1,39 1,47 Coefficient G 2,61 2,07 0,79 0,01 0,32 0,50 0,93 1,09 t-Statistic 8,14*** 8,27*** 3,49*** 0,04 1,23 2,42** 4,75*** 12,28*** Coefficient BROE 6,06 5,29 5,34 3,79 6,64 6,45 7,01 5,05 t-Statistic 9,87*** 10,94*** 13,71*** 14,95*** 19,07*** 21,69*** 22,92*** 34,98*** Coefficient DE -1,23 -0,95 -0,61 -0,30 -0,54 -0,58 -0,80 -0,68 t-Statistic -10,90*** -10,64*** -9,87*** -8,40*** -9,79*** -9,63*** -9,45*** -25,25*** Coefficient Dummy 0,04 -0,14 0,24 0,13 -0,16 0,18 -0,01 -0,03 t-Statistic 0,15 -0,70 1,59 2,00** 2,05** 2,30** -0,12 -0,74 R2 _{25,9% 26,7% 26,1% 27,6% 33,5% 34,0% 32,0% 29,0%} EVE s = 0 2000 2001 2002 2003 2004 2005 2006 SUR Sample Size 1.159 1.201 1.172 979 1.105 1.286 1.487 2.210 C 8,03 7,55 6,69 7,34 8,39 8,78 8,89 8,45 Coefficient G 8,73 4,78 0,81 2,84 2,14 3,81 5,98 3,25 t-Statistic 8,93*** 5,63*** 0,94 2,33** 1,67 3,42*** 6,44*** 8,61*** Coefficient DE -1,46 -0,71 0,19 -0,10 -0,05 0,03 0,27 -0,33 t-Statistic -4,26*** -2,32** 0,79 -0,40 -0,20 0,10 0,72 -2,77*** Coefficient Dummy -0,50 0,63 1,02 0,72 0,20 1,01 0,48 0,43 t-Statistic -0,52 0,92 1,74 1,62 0,52 2,40** 0,94 2,71*** R2 _{8,2% 3,4% 0,4% 0,9% 0,3% 1,4% 2,8% 4,9%} EVB s = 0 2000 2001 2002 2003 2004 2005 2006 SUR Sample Size 1.039 1.020 972 870 990 1.201 1.371 2.141 C 1,37 1,16 0,95 1,01 1,11 1,17 1,20 1,15 Coefficient G 1,39 0,81 0,26 0,23 0,11 0,37 0,39 0,45 t-Statistic 8,05*** 6,65*** 2,22** 1,44 0,60 2,43** 2,89*** 8,20*** Coefficient BROA 5,98 4,68 4,83 6,98 8,16 8,53 9,50 6,76 t-Statistic 6,57*** 7,18*** 9,55*** 11,60*** 13,52*** 15,40*** 17,38*** 28,70*** Coefficient DE -0,54 -0,33 -0,11 -0,12 -0,19 -0,23 -0,22 -0,22 t-Statistic -8,38*** -7,28*** -3,28*** -3,42*** -4,64*** -5,00*** -3,94*** -12,84*** Coefficient Dummy -0,09 -0,06 0,20 0,09 0,02 0,18 0,13 0,07 t-Statistic -0,55 0,71 2,69*** 1,65 0,31 3,07*** 1,75 3,20*** R2 _{19,3% 17,7% 13,8% 19,0% 22,0% 22,8% 22,2% 16,3%}

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Appendix #5: Results from the Persistent Misvaluation Hypothesis

Table 11

Results from the OLS and SUR Regressions for the Persistent Misvaluation

Hypothesis One Year Before the Announcement Date

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Table 12

Results from the OLS and SUR Regressions for the Persistent Misvaluation

Hypothesis Two Years Before the Announcement Date

PE s = 2 1998 1999 2000 2001 2002 2003 2004 SUR Sample Size 885 968 1.047 1.141 1.130 877 929 1.781 C 20,58 18,77 24,18 21,39 17,33 14,51 20,61 19,57 Coefficient G 16,93 14,60 25,00 15,88 18,68 0,34 4,35 14,57 t-Statistic 5,58*** 5,32*** 7,09*** 5,81*** 7,02*** 0,15 1,39 12,99*** Coefficient DE -3,08 -4,16 -11,18 -7,20 -2,94 -2,46 -4,13 -5,26 t-Statistic -2,81*** -4,66*** -9,36*** -7,34*** -4,07*** -5,47*** -6,10 -16,15*** Coefficient Dummy 1,72 4,16 1,40 1,21 1,04 -0,70 -1,74 -0,59 t-Statistic 0,75 2,07** 0,48 0,83 1,06 -0,92 -,122 -1,29 R2 _{4,3% 5,4% 12,3% 8,1% 5,9% 3,4% 4,1% 11,8%} PB s = 2 1998 1999 2000 2001 2002 2003 2004 SUR Sample Size 844 914 1.013 1.035 989 872 993 1.810 C 1,14 1,13 1,72 1,58 1,39 1,03 1,27 1,39 Coefficient G 1,34 1,34 2,61 2,03 0,80 0,02 0,31 1,35 t-Statistic 4,09*** 5,18*** 8,17*** 8,11*** 3,52*** 0,12 1,19 13,66*** Coefficient BROE 8,60 6,56 6,06 5,28 5,32 3,79 6,59 5,24 t-Statistic 19,00*** 14,64*** 9,87*** 10,92*** 13,65*** 14,92*** 18,88*** 31,81*** Coefficient DE -0,60 -0,50 -1,23 -0,96 -0,60 -0,29 -0,55 -0,67 t-Statistic -5,74*** -5,86*** -10,91*** -10,74*** -9,81*** -8,31*** -9,83*** -23,53*** Coefficient Dummy -0,06 0,04 0,04 0,13 0,06 0,04 -0,12 -0,01 t-Statistic -0,26 0,23 0,16 1,03 0,68 0,65 1,05 -0,19 R2 37,9% 27,5% 25,9% 26,6% 25,9% 27,4% 33,3% 28,3% EVE s = 2 1998 1999 2000 2001 2002 2003 2004 SUR Sample Size 955 1.021 1.159 1.201 1.172 979 1.105 1.926 C 7,07 8,10 8,04 7,48 6,68 7,38 8,45 7,94 Coefficient G 7,30 7,67 8,69 4,66 0,83 2,95 2,16 3,76 t-Statistic 6,65*** 6,71*** 8,90*** 5,50*** 0,96 2,43** 1,68 9,74*** Coefficient DE -0,40 -1,34 -1,46 0,68 0,21 -0,09 -0,06 -0,33 t-Statistic -1,19 -3,55*** -4,27*** -2,24** 0,88 -0,36 -0,22 -2,85*** Coefficient Dummy 0,10 0,70 -0,55 0,99 0,31 0,14 -0,37 -0,26 t-Statistic 0,12 0,77 -0,62 2,21** 0,92 0,32 -0,62 -1,56 R2 _{4,6% 5,6% 8,2% 3,7% 0,2% 0,6% 0,3% 3,9%} EVB s = 2 1998 1999 2000 2001 2002 2003 2004 SUR Sample Size 889 927 1.039 1.020 972 870 990 1.848 C 0,96 1,02 1,37 1,15 0,94 1,01 1,11 1,08 Coefficient G 1,04 1,64 1,39 0,79 0,28 0,24 0,11 0,60 t-Statistic 4,43*** 7,66*** 8,04*** 6,49*** 2,34** 1,51 0,60 9,93*** Coefficient BROA 11,20 9,82 6,00 4,67 4,84 6,96 8,15 7,04 t-Statistic 12,83*** 10,33*** 6,60*** 7,19*** 9,55*** 11,55*** 13,53*** 26,15*** Coefficient DE -0,14 -0,28 -0,55 -0,33 -0,10 -0,12 -0,18 -0,20 t-Statistic -1,90 -3,76*** -8,39*** -7,23*** -3,10*** -3,36*** -4,60*** -10,61*** Coefficient Dummy 0,23 0,01 0,03 0,14 0,05 0,06 0,08 -0,02 t-Statistic 1,37 0,07 0,22 2,25** 1,16 1,04 0,97 -0,79 R2 20,9% 20,8% 19,3% 18,1% 13,3% 18,8% 22,1% 14,4%

(12)

Table 13

Results from the OLS and SUR Regressions for the Persistent Misvaluation

Hypothesis Three Years Before the Announcement Date

(13)

Table 14

Results from the OLS and SUR Regressions for the Persistent Misvaluation

Hypothesis Four Years Before the Announcement Date

PE s = 4 1996 1997 1998 1999 2000 2001 2002 SUR Sample Size 584 752 885 968 1.047 1.141 1.130 1.677 C 19,00 19,74 20,45 18,66 23,92 21,29 17,63 20,25 Coefficient G 12,77 14,36 17,10 14,72 24,94 16,01 18,64 15,96 t-Statistic 3,36*** 4,10*** 5,64*** 5,36*** 7,08*** 5,87*** 7,01*** 13,39*** Coefficient DE -3,80 -1,89 -3,00 -3,89 -11,27 -7,21 -2,97 -4,53 t-Statistic -4,03*** -1,94 -2,74*** -4,39*** -9,43*** -7,36*** -4,11*** -11,75*** Coefficient Dummy -1,56 4,09 3,28 1,70 2,21 1,80 -1,97 1,07 t-Statistic -0,78 2,28** 1,57 1,26 1,39 1,29 -1,31 2,04** R2 _{4,9% 3,3% 4,5% 5,1% 12,5% 8,2% 6,0% 4,2%} PB s = 4 1996 1997 1998 1999 2000 2001 2002 SUR Sample Size 604 784 844 914 1.013 1.035 989 1.668 C 0,95 0,98 1,13 1,13 1,71 1,58 1,39 1,43 Coefficient G 0,20 1,37 1,36 1,34 2,60 2,05 0,81 1,45 t-Statistic 0,59 4,14*** 4,15*** 5,18*** 8,15*** 8,24*** 3,55*** 13,49*** Coefficient BROE 9,73 9,32 8,56 6,57 6,02 5,29 5,33 6,18 t-Statistic 21,08*** 21,26*** 18,91*** 14,66*** 9,79*** 10,94*** 13,66*** 34,47*** Coefficient DE -0,56 -0,65 -0,60 -0,50 -1,23 -0,96 -0,60 -0,74 t-Statistic -6,45*** -7,30*** -5,73*** -5,86*** -10,93*** -10,77*** -9,74*** -21,17*** Coefficient Dummy -0,16 0,17 0,34 0,07 0,11 0,12 0,05 0,07 t-Statistic -0,86 0,94 1,69 0,59 0,78 0,99 0,43 1,54 R2 49,5% 43,7% 38,1% 27,6% 25,9% 26,6% 25,9% 30,2% EVE s = 4 1996 1997 1998 1999 2000 2001 2002 SUR Sample Size 632 849 955 1.021 1.159 1.201 1.172 1.777 C 8,87 6,88 7,05 7,92 8,00 7,53 6,72 7,46 Coefficient G 9,17 8,92 7,32 7,53 8,70 4,82 0,84 5,19 t-Statistic 6,01*** 7,30*** 6,67*** 6,61*** 8,90*** 5,70*** 0,97 13,03*** Coefficient DE -0,42 -0,53 -0,39 -1,26 -1,47 -0,69 0,22 -0,30 t-Statistic -1,19 -1,70 -1,17 -3,35*** -4,29*** -2,26** 0,89 -2,35** Coefficient Dummy -0,19 2,07 0,51 1,98 0,14 0,23 -0,04 0,45 t-Statistic -0,23 3,19*** 0,67 3,38*** 0,29 0,52 -0,07 2,56** R2 _{5,8% 7,2% 4,6% 6,6% 8,2% 3,4% 0,1% 5,4%} EVB s = 4 1996 1997 1998 1999 2000 2001 2002 SUR Sample Size 599 821 889 927 1.039 1.020 972 1.700 C 0,83 0,86 0,96 1,01 1,35 1,14 0,95 1,01 Coefficient G 0,63 1,04 1,07 1,64 1,38 0,82 0,28 0,79 t-Statistic 2,23** 4,05*** 4,55*** 7,64*** 8,01*** 6,75*** 2,35** 11,45*** Coefficient BROA 14,39 14,53 11,08 9,84 6,01 4,66 4,85 8,84 t-Statistic 15,60*** 16,45*** 12,71*** 10,35*** 6,62*** 7,18*** 9,55*** 28,60*** Coefficient DE -0,16 -0,13 -0,14 -0,27 -0,55 -0,33 -0,10 -0,21 t-Statistic -2,17** -1,82 -1,87 -3,74*** -8,42*** -7,31*** -3,05*** -8,94*** Coefficient Dummy 0,17 0,06 0,36 0,07 0,11 0,13 0,00 0,07 t-Statistic 1,18 0,40 2,36** 0,62 1,42 2,15** 0,01 2,39** R2 35,6% 30,4% 21,2% 20,8% 19,5% 18,0% 13,2% 19,9%