The watchers on the wall: Inter-Korean geopolitical risk and firm risk-taking

Abstract

This article investigates the relationship between Inter-Korean geopolitical risk (IKGPR) and South Korean firms’ risk-taking in the context of highly political tensions in the Korean peninsula. Using a recently developed news-based index of geopolitical risk, our empirical analysis shows an inverse U-shaped relationship between IKGPR and firm risk-taking in South Korea, implying that South Korean firms’ risk-taking increases with IKGPR when IKGPR is low but becomes prudent when IKGPR is high. Such an effect of IKGPR on firm risk-taking is weaker for firms that survive wartime (1900–1969) and is stronger for firms that were established after the Second Korean War (1966–1969), suggesting the role of corporate resilience to geopolitical risk in motivating differences in corporate behaviors. Further analyses indicate that South Korean firms tend to take less risk when the nuclear risk is higher and when they are more technology-oriented. JEL CLASSIFICATION: G30, P00, O31