1 Idid thestudy, which includedsell-side equity research
reportsfromdifferentinvestmentbanksintheUnitedStates,
London,and Asia.About 75 percentwere fromtheUnited
States,about 15 percent fromEurope,and 10 percentfrom
Asia.
2 Firmsthat adoptdifferentrules forreportingand fortax
purposes generally report higher earnings to their
stockholdersthantheydotothetaxauthorities.Whenthey
arecomparedonaprice-earningsbasisto firmsthatdonot
maintain different reporting and taxbooks, they willlook
cheaper (lower P/E).
3 Withthemedian,halfofallfirmsinthegroupfallbelow
this value and half lie above.
4 Thereturnonequityof 40 percentbecomesaproxyforcash
flowpotential.Witha 20 percentgrowthrateanda 40 percent
returnonequity,thisfirmwillbe abletoreturnhalfofits
earningstoitsstockholdersintheformofdividendsorstock
buybacks.
5 Finding thesefirmsmanuallymaybetediouswhen your
universeincludes10,000stocks.Youcoulddrawonstatistical
techniques such as cluster analysis to find similar firms.
6 Both approaches described assume that the relationship
betweenamultipleandthevariablesdrivingvalueislinear.
Sincethisisnotalwaystrue,youmighthavetorunnonlinear
versions of these regressions.