Analysis of PBR Determinants Using ROE/CoE Ratio: Implications for the Korean Value-Up Program

This study aims to propose a quantitative criterion applicable to the Value-Up Program in the Korean stock market. With the simple theory, we re-interpret a firm's price-to-book ratio (PBR) as the ratio of return on equity (ROE) to the cost of equity (CoE). Using the analysts' earnings-per-share (EPS) forecasts for listed Korean firms from 2011 to 2024, we empirically examine the determinants of PBR. We first find that the estimated contribution of ROE/CoE to PBR is close to the theoretical benchmark of one, strongly supporting our theoretical prediction. In particular, we argue for the importance of distinguishing between high-quality (i.e., ROE/CoE > 1) and low-quality (i.e., ROE/CoE < 1) firms. A firm's payout ratio exhibits a positive effect on PBR only for low-quality firms, while the effect is weak or even negative for high-quality firms. A firm's ROE/CoE ratio plays a significant role as the primary explanatory variable for PBR across both KOSPI and KOSDAQ markets. However, additional analyses using a conventional (expost) ROE variable and a firm-specific beta coefficient in the stock market fail to show consistent results, suggesting that the Value-Up Program in Korea should consider a firm's forecast-based ROE and CoE.