Abstract
This study investigates the relationship between Price-Earnings ratio and return on stocks. The result is used to appraise the efficiency of the Korean stock market. Findings statistically opposed S. Basu (1977) results. He realized Price-Earnings ratio effect but I found no statistical evidence supporting Price-Earnings ratio. Using Fama and Macbeth (1973) methodology of portfolio formation, I found no statistical Price-Earnings ratio nor size effect. If a test of financial market efficiency depends on Price-Earnings ratio and size effect only, then Korean stock market is efficient. However, within this context, it was difficult to determine the extent to which the market is efficient. The bid-ask spread (measure of information asymmetry) Will be study next to figure out the degree of market efficiency.
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