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1Dr. Asheesh Pandey is currently working as an Associate Professor at the Fortune Institute of International Business, New Delhi. He has published over 20 research papers in the area of capital markets, market efficiency, equity valuation, asset pricing, etc., in National and International Journals and has authored a book on the Indian Financial System. He can be reached at asheeshpandey@rediffmail.com
In this paper, we evaluate the efficacy of two value drivers namely, earnings per share and book value for developing stock price forecasts using two performance evaluation criteria: 1) root mean squared error and 2) Thail inequality coefficient. We employ data for 13 sectors of BSE 500 from 1991 to 2010. We conduct our analysis in two phases. In phase one, we find that price to earnings is the better stand alone price multiple than price to sales in the Indian context. In the next phase, we show that the combination of value drivers does not significantly improve price forecast vis-à-vis stand alone multiples. Our findings are extremely relevant for equity analysts and portfolio managers who are continuously involved in equity evaluation and developing global asset allocation strategies.
Price to Earnings, Price to Book Value, Relative Valuation, DCF, Price Multiples, Equity Valuation, Value Driver
JEL classification: C51, C52, G11 and G15
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