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

Abstract

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.