A Panel Analysis of the Impact of EBITDA, Equity Book Values, Growth, Risk and Negative Earnings on Share Price Variations

Abstract

This study was motivated by the recent prevalence of valuation professionals utilizing EBITDA measures as part of their equity valuation strategies. To examine the impact of such valuation measures on share price variations, we developed a variant of the Ohlson valuation model that relates EBITDA, equity book values, growth, risk and negative earnings to share prices. We validated this relationship by utilizing the complete time-series data of the largest companies listed on the Johannesburg Stock Exchange from 1994 to 2017. We found that our model specification accounted for over 87% of the variance in the logarithmic-transformed share prices. Furthermore, the response coefficients for each explanatory variable were statistically significant, regardless of whether companies or sectors were incorporated as cross-sections. These findings have several significant empirical implications. Firstly, they demonstrate that EBITDA and equity book value variables significantly impact share price variations. Secondly, they lend credence to the hypotheses that growth and risk factors impact share price variations, and that negative earnings are value relevant. Ultimately, these findings constitute conclusive evidence of the empirical validity of the model specification we posit. JEL classification codes: G10, G12, G14, G11, G32, M41.