What Really Explains the Korea Discount and PBR? A Comparison of the Growth Potential, Shareholder Payout, and Governance Hypotheses

This study investigates which factors - growth potential, shareholder payout, or corporate governance—explain the persistently low price-to-book ratios(PBRs) of Korean firms. We find that corporate governance has no significant relationship with PBR, and firms with higher shareholder payout tendencies tend to have lower PBRs. This contradicts prevailing hypotheses that associate shareholder payout and governance improvements with higher valuations.In contrast, variables linked to corporate growth potential exhibit a strong correlation with PBR. Firms with low research and development (R&D) expenditures and investments, those with a higher proportion of tangible assets (e.g., plants and land) rather than intangible capital (e.g., patents and brand value), and mature firms beyond their growth phase tend to have lower PBRs. These findings suggest that the low PBR of Korean firms is primarily stem from weak growth prospects. A low PBR has traditionally been associated with high stock returns due to the value premium effect. However, this effect, both in Korea and globally, declined sharply following the 2008 global financial crisis. Therefore, the low PBR and stock returns of Korean firms can be interpreted as a consequence of the disappearance of the value premium in an environment of diminishing corporate growth potential.