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The equity premium puzzle : An empirical investigation of Korean stock market

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Frame of Image ing, (1) implied costs of capital, (2) equity premia, and (3) firm characteristics affecting the expected rates of return. We compare the implied costs of equity capital in Korea stock market and U.S. stock market. A ma jor research question is whether companies listed in emerging market have disadvantage as they are underpriced through higher implied costs of capital compared to the companies traded in the developed market. The results suggests that the estimated cost of equity capital for the Korean stock market is, on average, much higher than that of the U.S. stock market. However, it seems that the “Korea discount” has been significantly eased in recent years. Lastly, we could find significant association between the measure of the implied cost of capital in relation with variables that affect the risk and profitability perceived by market investors. Key words: Analysts’ forecasts, cost of capital, equity premium, firm characteristics, Korea discount,Korean stock market, required rate of return
JEL classification: G12, G14, G15, M40, M41
∗
The author acknowledges the financial supp ort provided by KDI Scho ol of Public Policy and Man-
agement. The author gratefully acknowledges the helpful comments from seminar participants at the KDI School of Public Policy.
1 Email:
TChoi@KDIscho ol.ac.kr
Address: 87 Ho egiro Dongdaemun Gu, Seoul 130-868 Korea Telephone: 82-3299-1221, Fax: 82-3299-1240
1
Intro duction
The purpose of this study is to examine the expected rates of return for the c


Full Text
Title The equity premium puzzle
Similar Titles
Sub Title

An empirical investigation of Korean stock market

Material Type Reports
Author(English)

Choi, Tae Hee

Publisher

Seoul:KDI School of Public Policy and Management

Date 2007
Series Title; No KDI School Working Paper Series / 07-22
Pages 29
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < Financial Policy
Holding KDI School of Public Policy and Management

Abstract

"The purpose of this study is to examine the expected rates of return for the companies listed in the Korean stock market by investigating, (1) implied costs of capital, (2) equity premia, and (3) firm characteristics affecting the expected rates of return. We
compare the implied costs of equity capital in Korea stock market and U.S. stock market. A
major research question is whether companies listed in emerging market have disadvantage as they are underpriced through higher implied costs of capital compared to the companies
traded in the developed market. The results suggests that the estimated cost of equity capital for the Korean stock market is, on average, much higher than that of the U.S. stock market. However, it seems that the “Korea discount” has been significantly eased in recent
years. Lastly, we could find significant association between the measure of the implied cost
of capital in relation with variables that affect the risk and profitability perceived by market investors."