Stock Market Reaction to the Trade Dispute: South Korea-Japan Trade Dispute Case

Abstract

This study examines the impact of geopolitical risks on the stock market, with a focus on the 2019 South Korea-Japan trade dispute. Using the event study methodology, we estimate the abnormal returns of manufacturing companies in South Korea directly related to Japan’s export restrictions. Our findings reveal that the exclusion of South Korea from a Japanese Whitelist had a negative effect on the stock prices of manufacturing companies in South Korea. The cumulative abnormal return (CAR) of Korean manufacturing companies was -6.26%, and 86.64% of 232 sample companies experienced a negative CAR. The study also confirms that small and medium-sized enterprises (SMEs) are more vulnerable to geopolitical risks than large companies. This study provides practical implications for firm managers and policymakers as the first study that provides empirical evidence of the stock market reaction to the South Korea-Japan trade dispute.