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2023 Feb/16
Analysis on the Causes behind the Korea Discount
Issue Papers 23-05
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- Research Topic Capital Markets
- Page 26
- Summary
- The "Korea discount" refers to the phenomenon in which the stocks listed in Korea are underpriced compared to those of similar foreign listed companies. More often than not, this expression is used to intensively describe the vulnerability of Korea's stock market. Since it was first observed in the early 2000s, this phenomenon has persisted and been recognized as an issue that needs to be solved for the market to make a new leap forward.
Against the backdrop, this paper looked into the data of 45 companies listed on major stock markets, seeking to identify the causes behind the Korea discount and to carry out empirical analyses. Our empirical analyses confirmed that there is an evident level of the Korea discount that has been persistently observed. During the period between 2012 and 2021, the book-value ratios of Korean listed companies were ranked 41st out of 45 countries, and the ratios were only 52% of those in advanced economies and 58% in emerging markets. Also, the discount has been observed consistently in all sectors except for healthcare. A regression analysis on the causes behind the discount pointed to three problematic areas: low shareholder returns; low profitability and growth potential; and vulnerable corporate governance. However, explanatory power was found relatively low in the factors such as accounting transparency and the share of institutional investors, both of which are known to affect corporate valuation. Moreover, there was no evidence that geopolitical risks and short-termism in investment affect corporate valuation.
Numerous endeavors have been made to improve regulations and practices related to Korea's shareholder return policy and corporate governance, which have long been pointed out as primary causes behind the Korea discount. However, there is still a significant gap between Korea and major advanced economies in terms of the evaluation of shareholder returns and corporate governance. What is needed at the current state is a viable, all-out approach in the long run that is expected to address the Korea discount and to help the Korean stock market to reach a qualitatively new level. This requires not only regulatory improvements but also enhancements in real practices, perception, and active engagement by investors.