Article1997

A Fundamental Analysis of Korean Stock Returns

Sandip Mukherji · Manjeet S. Dhatt · Yong Hyuck Kim

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Financial Reporting and Valuation Research

Abstract

Korea has one of the largest stock markets in the world and is in the process of being opened to foreign investors. In an investigation of the relations between stock returns and fundamental variables in Korea, annual stock returns during the 1982–93 period were positively related to book–market, sales–price, and debt–equity ratios, negatively related to firm size, and not significantly related to the earnings–price ratio or beta. These results add to the growing international evidence that value stocks outperform growth stocks over long periods. Also for Korean stocks, book–market and sales–price ratios are more efficient indicators of value than the earnings–price ratio, and the debt–equity ratio is a more reliable proxy for risk than beta.

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References

1993Common risk factors in the returns on stocks and bonds 1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1992The Cross-Section of Expected Stock Returns 1965The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1981The relationship between return and market value of common stocks 1995Size and Book-to-Market Factors in Earnings and Returns 1972

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