The effect of geopolitical risk on corporate cash holdings: evidence from Korea

ABSTRACT

This study investigates the effect of geopolitical risk (GPR) on cash holdings of Korean firms. Korea’s export orientation, relationship with North Korea, and weak corporate governance together form the basis for studying the relationship between GPR and Korean firms’ cash holdings. Using samples of non-financial firms from 2001 to 2021, I find the GPR positively affects corporate cash holdings. This effect is more pronounced in firms with financial constraints, listed in the KOSDAQ (smaller and less regulated) market, and during cold market periods. My finding withstands various robustness tests including fixed effects, an instrument-variable analysis, and alternative measures of GPR. Overall, this study adds to the existing literature on corporate cash holdings by confirming that firms increase cash holdings with a precautionary motive to create a buffer against GPR-generated uncertainty.

KEYWORDS:

• Geopolitical risk (GPR)
• GPR index
• cash holdings
• precautionary motive

JEL CLASSIFICATION:

• G18
• G32
• G38

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ According to the Korea Statistical Information Service (KOSIS), the ratio of exports to GDP is 31.28% as of 2020 whereas in the G12 countries, it is 19.83% for the same year.

² In a recently published report (CG Watch 2020, published by Asian Corporate Governance Association (ACGA)), Korea’s corporate governance has been ranked 9th out of 12 Asian countries.

³ Appendix B provides further details on the index.

⁴ DataGuide is a data mining service of FnGuide containing firm level financial and market data (https://www.fnguide.com/).

⁵ Appendix C provides details on index definitions.

Additional information

Funding

The work was supported by the Jeonbuk National University .