Firms’ Management of Infrequent Shocks

Abstract

We examine businesses' financial management of a rare, severe event using detailed firm-level data collected following Hurricane Sandy in the New York area. Credit played a prominent role in financing recovery; more negatively affected firms took on debt because of Sandy (38%) than received insurance payments (15%) in our data. Negatively affected firms were often credit constrained after the shock. While firms' demand for insurance is often explained by financing frictions, we find that the most credit constrained firms after the event, younger firms and smaller firms, were the least likely to insure before it.

Financing Recovery After Disasters: Explaining Community Credit Market Responses to Severe Events

“…This increase in demand is due to a combination of the need to replace lost property, reduced revenues, and increased expenses from the disaster. Collier et al (2016) examine credit demand following Superstorm Sandy among SMEs in one of the most developed markets in the world, the New York City area. One-third of surveyed firms in the government-declared disaster area were negatively affected by the storm through a combination of property damage, customer and supply chain disruptions, and utility outages.…”

“…We find this explanation unlikely for two reasons. First, disasters seem to increase credit demand even in the most developed countries (Collier et al, 2016). Even in these markets, the disaster losses of households and businesses tend to outstrip aid relief (Kousky and Shabman, 2012).…”

“…Credit Contraction? Previous research indicates that disaster vulnerability is decreasing in economic development (Klomp and Valckx, 2014) and, in the United States at least, in business size (e.g., Basker and Miranda, 2016;Collier et al, 2016). In the Online Appendix (Collier and Babich, 2017), we divide our data at the median according to (1) a country's economic development, (2) lender size, and (3) average loan balance per borrower.…”

“…For example, Superstorm Sandy resulted in total economic losses of $71 billion (NOAA HRD, 2014) and insured losses of $35 billion (Swiss Re Sigma, 2013). Collier et al (2016) note that New York area businesses affected by Sandy frequently reported 13 Swiss Re, Sigma Database. All rights reserved.…”

“…Households and businesses often turn to credit to finance recovery following a natural catastrophe (Del Ninno, Dorosh, and Smith, 2003;Berg and Schrader, 2012). For example, Collier et al (2016) examine effects of Superstorm Sandy on businesses in the New York area and find that 40 percent of negatively affected firms increased their debt because of the event. Moreover, more of the firms negatively affected by Sandy borrowed to finance recovery than received insurance payments.…”