The Korea Discount and Chaebols

Abstract

Finance practitioners frequently claim that stocks of Korean firms are undervalued and trade at a discount relative to foreign firms. This phenomenon is commonly called "the Korea discount". It is based on anecdotal evidence comparing either the price-earnings ratios of different market indexes or those of different individual stocks. This paper provides empirical evidence on the existence of such a discount using a large sample of stocks from 28 countries over the period 2002-2016. We find that Korean stocks have significantly lower price-earnings ratios than their global peers. We also investigate the role of large business groups called chaebols, which are often considered to be the main cause of the discount because of their poor corporate governance. Our findings show that it is not the case.

Keywords: valuation, price-earnings ratio, business groups, emerging markets, Korea

JEL Classification: G15, G32