Source: Loughran & Wellman (2011) · Journal of Financial and Quantitative Analysis · DOI: 10.1017/s0022109011000445
TL;DR
The enterprise multiple — EM = (equity + debt + preferred − cash) / EBITDA — is a strong cross-sectional return predictor. Low-EM (cheap) firms earn higher subsequent returns; the authors build an EM factor earning ~5.3%/yr. They interpret EM as a proxy for the discount rate: low-EM firms have high required returns.
What anomaly it documents
Predictor: enterprise multiple (enterprise value / EBITDA).
Direction: negative in EM — low-EM (cheap) firms earn more.
Shape: monotone; EM factor ~5.3%/yr.
OSAP predictor: EntMult.
How to construct it
Sorting variable: EM = (market equity + total debt + preferred − cash) / EBITDA.
Universe: NYSE/AMEX/Nasdaq common stocks.
Portfolio formation: rank into EM deciles.
Long / short: long low EM, short high EM.
Weighting: value-weighted; factor built à la Fama-French.
Rebalancing: annual.
Evidence and replication
Period
Notes
Source
IS (1963–2009)
EM factor ~5.28%/yr; dominates many value proxies
this paper
OOS (post-2011)
popular practitioner value proxy; persists
post-publication
OSAP (EntMult)
replicates
Chen & Zimmermann 2022
Why it might work
Discount-rate proxy: low EM signals a high required return (a value/risk story).
Capital-structure neutral: using enterprise value makes it comparable across leverage.
Limitations and risks
Value overlap: highly correlated with book-to-market and other value measures.
EBITDA quirks: sensitive to accounting and negative-EBITDA firms.
Crowding: a heavily used practitioner signal.
Key references
Loughran, T. & Wellman, J. (2011) — New Evidence on the Relation between the Enterprise Multiple and Average Stock Returns — JFQA — DOI: 10.1017/s0022109011000445
Fama, E. & French, K. (1993) — Common Risk Factors in the Returns on Stocks and Bonds — JFE
Provenance: generated from the paper's abstract and metadata, not full text; sample periods and replication notes are indicative — verify against the source.
