Relative Valuation, Risk Factors and Investment Strategies: An Empirical Study of Real Estate Industry in China

This paper studies a new framework of the relative valuation (MV/TA) across all firms within business industries by developing a multifactor relative valuation model and further proposing relative-valuation-based investment strategies. This framework aims to resolve two academic and practical puzzles: (1) the efficacy of relative valuation in identifying firm value and (2) its potential in formulating investment strategies. By utilizing a sample collection of Chinese real estate companies listed from 2010 to 2023, we conduct a comprehensive empirical exploration of the relative valuation (MV/TA) of these companies by constructing a multifactor model that integrates risk factors over ten categories. More specifically, we leverage historical value comparisons and execute panel regressions with MV/TA as the dependent variable, and apply both the Yeo-Johnson transformation and the two-way clustering to enhance model performance. Moreover, two types of investment strategies (the factor-based strategy versus the value-based one) are developed from the multifactor relative valuation model. The empirical findings suggest that the approach of relative valuation can informatively distinguish high- and low-valued firms and effectively identify the underlying driving factors, facilitating the construction of investment portfolios with higher returns. That is, the relative valuations of firms are determined mainly by micro-level factors, while market conditions significantly influence the performance of investment strategies.