101. MEASURING VALUATION UNCERTAINTY: A PCA APPROACH.
- Author
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GARCIA, JOHN
- Subjects
MULTIPLE correspondence analysis (Statistics) ,ORGANIZATIONAL ideology ,UNCERTAINTY ,DISCOUNTED cash flow ,ECONOMIC shock - Abstract
Determining which companies are more difficult to value is a topic of significant interest in finance. While prior studies have employed various univariate proxies to classify firms into high- and lowvaluation uncertainty groups, this study proposes a new approach to measuring valuation uncertainty. Specifically, I employ principal component analysis (PCA) to extract the first principal component from 11 valuation uncertainty proxies. The first principal component is proposed as a comprehensive measure of a firm's valuation uncertainty. The findings demonstrate that the PCAderived valuation uncertainty index provides two key benefits over univariate valuation uncertainty proxies. First, integrating multiple valuation uncertainty proxies into a single metric improves our ability to quantify valuation uncertainty. Second, it assists in identifying the proxies that are most informative in measuring a firm's valuation uncertainty. Ultimately, the PCA-derived valuation uncertainty index can better enable market participants to measure a firm's valuation uncertainty. [ABSTRACT FROM AUTHOR]
- Published
- 2023
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