Abstract
We explore the link between firm-specific variations in stock returns and firm fundamentals in the context of a simple present value framework and test the effect of market openness and firms' industry belonging on stock price informativeness in Korea. Using detailed accounting data and an extensive control for firm-specific characteristics, we find that alternative proxies of cash flow shocks explain a significant part of the variation in firm-specific returns. The effect, however, is not uniform across market sectors. Although greater foreign shareholding in a firm is important to establish a stronger positive linkage between cash flow shocks and stock returns variation prior to the Asian financial crisis, this condition is not necessary after the Korean market was fully opened up to the foreign investors in the post-crisis period.
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