This study aims to determine relevant variables and the most accurate fundamentals for valuing firms based on their systematic risk exposure. It addresses gaps in the theoretical framework of peer selection and the incomplete discussion on the relevant fundamentals for implementing multiple-valuation methods based on risk concepts.
The study uses cluster analysis to group firms from the S&P500, considering risk factors and evaluating which fundamentals provide the best description. Systematic risk exposure is defined using the Capital Asset Pricing model (CAPM), three-factor, and five-factor models. Linear combinations of fundamentals are applied based on the framework by Nel et al. (2014).
The findings reveal that combinations of Size and return on equity (ROE) and Size and return on invested capital (ROIC) are the most effective in replicating systematic risk-based clusters across firms. In line with previous literature, clusters based on the three-factor model are the most stable and homogeneous.
This research contributes to the sparse theoretical understanding of systematic risk-based peer grouping. It identifies specific combinations of fundamentals that enhance risk-based clustering methods’ consistency and explanatory power.
