The Korean Discount

If you think that accounting standards dont matter, consider recent events in South Korea. For many years, international investors complained that the financial reports of South Korean companies were inadequate and inaccurate.

Accounting practices there often resulted in huge differences between stated revenues and actual revenues. Because investors did not have faith in the accuracy of the numbers, they were unwilling to pay as much for the shares of these companies relative to shares of comparable companies in different countries. This difference in share price was often referred to as the Korean discount.

In response, Korean regulators decided that companies would have to comply with international accounting standards. This change was motivated by a desire to make the countrys businesses more transparent in order to build investor confidence and spur economic growth.

Many other Asian countries, including China, India, Japan, and Hong Kong, have also decided either to adopt international standards or to create standards that are based on the international standards.

Source: Evan Ramstad, End to Korea Discount? Wall Street Journal (March 16, 2007).

Please give your comments on

1. The importance of making the business of the country so transparent.

2. Why increased transparency will stimulate economic growth of the country?