EV/EBITDA multiples and country risk: An analysis of market data from 40 countries from January 2009 to March 2016

Abstract

One of the cornerstones of economic and financial theory is that an investor demands compensation for taking on risk. An increase in risk must therefore be rewarded in some financially measurable manner.The main subject of this thesis is to analyze whether this principle of risk and reward can be seen in value multiples of publicly traded companies in markets with different country risk measures.The research question that is to be answered is: Does historical market data demonstrate that EV/EBITDA multiples of publicly traded firms differ significantly between countries with different sovereign credit ratings?As a means of analyzing this, market data from over two-thousand publicly traded companies from forty different countries is compiled. This results in a vast dataset with daily market data from a reference period of January 2009 to April 2016.The data are divided into twelve different groups based on the primary operating industry of the firms in the dataset. For each of these industries panel data models are calibrated for testing of the data.The major result is that with 11 of the 12 models, the credit rating value coefficient is not a significant predictor of EV/EBITDA multiple and in the 12th model it is only significant at the 10% confidence level. The primary industry group that has a significant effect is IT Consulting, computer related services and computer programming. This means that the market data in the dataset for this reference period do in most cases not indicate that the sovereign credit rating has a significant effect on EV/EBITDA multiples of firms in that country. An interesting observation about the model results is that, disregarding that the coefficients are not significant, the signs of the coefficients are positive in six models and negative in six models.