Abstract:This paper investigates which comparables selection method generates the most precise forecasts when valuing European companies with the enterprise value to EBIT multiple. We also consider the USA as a reference point. It turns out that selecting comparable companies with similar return on assets clearly outperforms selections according to industry membership or total assets. Moreover, we investigate whether comparables should be selected from the same country, from the same region, or from all OECD members. For most European countries, choosing comparables from the 15 European Union member states yields the best forecasts. In contrast, for the UK and the US, comparables should be chosen from the same country only. JEL Classification Codes: G19, M41# We would like to thank Ernst Maug and Niels Ulbricht for helpful discussions and comments. We gratefully acknowledge financial support by the Rudolf von Bennigsen-Foerder foundation and by the Deutsche Forschungsgemeinschaft through the SFB 649 "Economic Risk".

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This paper investigates industry classification systems. During the last 50 years there has been a considerable discussion of problems regarding the classification of economic data by industries. From my perspective, the central point of each classification is to determine a balance between aggregation of similar firms and differentiation between industries. This paper examines the structure and content of industrial classification schemes and how they affect financial research. I use classification systems provided by the Worldscope and the Compustat database. First, this study gives a detailed description of the structure and methodology of industrial classification systems and the relevance in leading finance and accounting journals.Second, I construct a benchmark classification system to measure the performance of different systems and provide evidence that some systems a more homogeneous in terms of value drivers than others. Third, I examine how multiple valuation is influenced by industry classification and show that the results vary significantly for different systems. * I would like to thank Roumiana Slavova for her support, Ernst Maug, Ingolf Dittmann and Niels Ulbricht for helpful discussions and comments. I gratefully acknowledge support by the Rudolf von Bennigsen-Foerder foundation and the Deutsche Forschungsgemeinschaft through the SFB 649 "Economic Risk".

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