Firmswithhighandpositiveexcessreturnswilltendtohave
high value-to-book ratios, whereas firms with low and
negative excess returns will generally have lower
value-to-book ratios.Thefirms thataremisvalued willfall
intooneoftheothertwoquadrants.Intheupperleft-hand
corner will be the overvalued firms with high enterprise
value-to-capital ratios and negative or very low excess
returns. In the bottom right-hand corner will be the
undervalued firms that trade at low value-to-capital ratios
while maintaining large, positive excess returns.
Regressions
The limitation of the matrix approach is that while
highlighting outliers is easy, it is difficult to differentiate
betweenfirmsthatarenotdramaticallyover-orundervalued.
Furthermore, it is difficult to control for more than two
variablesinagraphsincewecannotcreatemorethanthree
dimensions on a graph. Regressions are a much more