Firm specific variation in returns and fundamentals in Korea stock market

This paper provides an in-depth study of the linkage between firm-specific variation in returns and fundamentals in Korea. While international studies of the emerging Asian market shows firm stock prices variation is related to their fundamentals there is a common problem of inaccuracy and lack of sufficient number of samples. We try to overcome the insufficiency of the spans of time-series data and consequent loss of statistical testing power by using firm-level micro panel data from Korean stock market. Using detailed accounting data, we test for the Fama-French 3 factor models, and see if the increasing foreign investor participation in the Korean market has effect upon the relation between stock prices and fundamentals. The results show positive correlations and significant firm-specific information incorporated in the stock price volatility. Also, firms with higher foreigner shareholder ratio, used to proxy for stock monitoring and corporate governance, seemed to show higher correlation between cash flow shocks and stock price returns volatility.