From 2012 to 2021, Korea’s P/B ratio was 52% of developed markets and 58% of emerging markets.
The Korea Discount is observed across all sectors except healthcare.
Korea ranks among the lowest in P/B ratios among 45 countries.
Opinion
The Korea Discount stems from weak shareholder returns, sluggish growth, and poor corporate governance.
Korean firms’ reluctance to distribute profits and invest in future industries undermines investor confidence.
Governance issues, including dominant shareholder control and low transparency, deter foreign investment.
While accounting credibility and institutional investor influence remain weak, geopolitical risks and short-term trading behavior are not primary causes.
Core Sell Point
To mitigate the Korea Discount, Korean firms must adopt stronger shareholder return policies, increase investments in high-growth industries, and enhance governance transparency.
This study empirically analyzes the causes of the "Korea Discount," a phenomenon where the valuation of publicly traded Korean companies is lower compared to their foreign counterparts. Using data from 45 major economies, it examines the current state and characteristics of the Korea Discount and identifies the key contributing factors.
1. Current State of the Korea Discount:
The Korea Discount is persistent and significant. From 2012 to 2021, the price-to-book (P/B) ratio of Korean listed firms was only 52% of that in developed markets and 58% of that in emerging markets.
It is observed consistently across all sectors except for healthcare.
Korea ranks among the lowest in P/B ratios among the 45 analyzed countries.
2. Key Causes of the Korea Discount:
1) Weak Shareholder Return Policies: Korean companies tend to be reluctant to return profits to shareholders. Low dividend payouts and limited share buybacks contribute to investor dissatisfaction, leading to lower valuations. Investors, especially those favoring dividend income, find Korean firms less attractive due to their conservative shareholder return strategies.
2) Low Profitability and Growth Potential: Compared to global peers, Korean firms exhibit weaker profitability and growth prospects. This undermines investor confidence in their long-term potential. Insufficient investment in technological innovation and emerging industries further clouds future growth expectations.
3) Weak Corporate Governance: Korean companies often operate under a controlling shareholder structure, with limited protection for minority investors. Issues such as a lack of board independence, weak governance transparency, and insider transactions allow management to prioritize personal interests over corporate value. This deters foreign investment and negatively impacts stock valuations.
3. Additional Contributing Factors:
Accounting Transparency Issues: There is a perception that Korean firms lack financial transparency, leading to investor uncertainty. However, improvements have been observed following the adoption of IFRS.
Low Institutional Investor Presence: Institutional investors, who typically enhance market efficiency and corporate oversight, play a relatively minor role in Korea's stock market.
Short-Term Trading Behavior: Korea's stock market is characterized by high retail investor participation and rapid turnover, fostering speculative trading rather than long-term investment.
Geopolitical Risks: Tensions with North Korea and diplomatic frictions with neighboring countries contribute to investor hesitancy, though this study finds no direct correlation between geopolitical risks and the Korea Discount.
4. Evaluation Methodology:
Regression Analysis: Assesses the impact of various factors on stock valuations using P/B ratios as the dependent variable.
Dominance Analysis: Measures the relative explanatory power of different factors to determine their significance in driving the Korea Discount.
Conclusion:
Addressing the Korea Discount requires a multi-faceted approach:
Enhancing shareholder return policies through higher dividends and share buybacks.
Strengthening profitability and growth prospects by investing in emerging industries.
Improving corporate governance transparency and minority shareholder protections.
Sustained efforts from companies, investors, and policymakers are essential to closing the valuation gap and making the Korean market more attractive to global investors.
