Political uncertainty and stock prices: Evidence from South Korea’s martial law crisis

This study examines the impact of political uncertainty on corporate stock returns by exploiting South Korea’s unexpected 2024 martial law declaration as an exogenous political shock. Using firm-level data, we find that firms with higher foreign ownership or greater financial flexibility outperformed during the crisis. These results suggest that investors reallocated capital toward safer domestic assets rather than fully withdrawing from the country in response to the political shock. Moreover, this flight-to-quality effect was transitory, dissipating within a few days. Taken together, our findings contribute to the literature by providing novel evidence of within-country portfolio rebalancing toward safer firms during extreme political uncertainty, refining the conventional view that such shocks primarily induce capital flight. The results also highlight the importance of rapid and credible institutional responses in mitigating capital outflows during periods of acute political turmoil.