Kim's Shock: Geopolitical Tension and Corporate Investment

Abstract

The North Korea nuclear weapon tests precipitated geopolitical tension in northeast Asia. We document a decrease in the average investment ratio of Chinese firms following each nuclear test. Unlike other types of uncertainties, the impact spreads from the conflict zone and dwindles away from the test site. Apart from the geographical features, we find that the geopolitical tension impact is larger for firms that are not owned by the Chinese central government and rely heavily on external finance. Our results suggest that the fear of nuclear pollution rather than the war outbreak is the primary concern when making investment decisions.