themarketmoodalsoimpliesthatusingrelativevaluationto
estimatethevalueofanassetcanresultinvaluesthataretoo
highwhenthemarketisovervaluingcomparablefirms,ortoo
lowwhenitisundervaluingthesefirms.Third,whilethereis
scope for bias in any type of valuation, the lack of
transparencyregardingtheunderlyingassumptionsinrelative
valuations makes them particularly vulnerable to
manipulation.Abiasedanalystwhoisallowedtochoosethe
multipleonwhichthevaluationisbasedandto choosethe
comparablefirmscanessentiallyensurethatalmostanyvalue
can be justified.
STANDARDIZED VALUES AND MULTIPLES
Whencomparingidenticalassets,wecancomparetheprices
of theseassets. Thus, the price of a Tiffany lamp canbe
comparedtothepriceatwhichanidenticalitemwasbought
orsoldinthemarket.However,comparingassetsthatarenot
exactlysimilarcanbeachallenge.Ifwehavetocomparethe
pricesoftwobuildingsofdifferentsizesinthesamelocation,
thesmaller buildingwith itslower pricewill lookcheaper
unlesswe controlforthesizedifferencebycomputing the
price per square foot. Things get even messier when
comparingpubliclytradedstocksacrosscompanies.Afterall,
thepricepershareofastockisafunctionbothofthevalueof
theequityinacompanyandthenumberofsharesoutstanding
in thefirm.Thus,a stocksplitthatdoubles thenumberof
unitswillapproximately halvethestock price.Tocompare
the values of similar firms in the market, we need to
standardize thevalues in some way by scaling them to a
common variable. In general, values can be standardized
relativetotheearningsfirmsgenerate,tothebookvalueor
replacementcostofthefirmsthemselves,totherevenuesthat