The US-Korea free trade agreement as a shock to product market competition: Evidence from the Korean stock market

This study examines the effect of product market competition on stock returns by treating the establishment of the US Korea Free Trade Agreement (KORUS FTA) as an external shock. We use the degree of tariff reduction resulting from the KORUS FTA to construct a unique dataset for measuring product market competition. We sort firms into high-tariff-change (treatment group) and low-tariff-change groups (control group) and use the controlled difference-in-differences method to mitigate any possible endogeneity problems. We find clear empirical evidence that product market competition significantly negatively affects stock returns.