Multi-Period Lead Relations between Price-to-Book Ratios and Accounting Rates-of-Returns: Korean Evidence

Using a sample of Korean firms, this paper investigates the relations between price-to-book ratios and their determinants identified by Ohlson's (1995) accounting-based valuation model. A particular emphasis is placed on thequestion of whether and how the impact of future accounting rates-of-returns on current price-to-book ratios decays within a finite time horizon. Our results reveal that any current price-to-book ratio is significantly relatedto current and future accounting rates-of-returns over the five subsequent years.The relation between the two is stronger when accrual earnings are used for measuring accounting rates-of-returns than it is when cash flows or dividend flows are used. Further, the strength of this multi-period lead relation tends to decrease substantially in magnitude and significance with the time horizon, and becomes insignificant beyond a certain time horizon.