Natural Disasters, Damage to Banks, and Firm Investment

Abstract

This paper investigates the effect of banks' lending capacity on firms' capital investment. To overcome the difficulties in identifying purely exogenous shocks to firms' bank financing, we utilize the natural experiment provided by the Great Hanshin-Awaji (Kobe) Earthquake in 1995. Using a unique firm-level dataset that allows us to identify firms and banks in the earthquake-affected area, together with information on bank-firm relationships, we find that the investment ratio of firms located outside of the earthquake-affected area but with their main banks inside the area was lower than that of firms that were both located and had their main banks outside of the area. This result implies that the weakened lending capacity of damaged banks exacerbated the borrowing constraints on the investment of their undamaged client firms. We also find that the negative impact is robust for two alternative measures of bank damage: that to the bank headquarters and that to the branch network. However, the impacts of the two are different in timing; while that of the former emerged immediately after the earthquake, the latter emerged with a one-year lag.

Household Finance after a Natural Disaster: The Case of Hurricane Katrina

“…We also contribute to the literature on the role that the geographic location of lending institutions plays in the economic recovery of a region after an environmental disaster (e.g., Morse 2011, Hosono et al 2012. We are the first, we believe, to show how a US homeowner's affiliation with a local mortgage lender (rather than a nonlocal lender) is highly correlated with post-disaster debt levels and the decision to rebuild.…”

“…The location of a lender in relation to the location of the natural disaster can have an impact on the lender's response (Hosono et al 2012, Chavaz 2014. Our results suggest that a higher relative proportion of local lending at the time of a disaster can increase the amount of post-disaster rebuilding.…”

Natural Disasters and Demand for Redistribution: Lessons from an Earthquake

“…Skidmore and Toya (2002) and Toya and Skidmore (2014) assess a country's exposure to disasters as the number of significant events occurred in a certain period. Barrot and Sauvagnat (2016), Hosono et al (2016) and Calo-Blanco et al…”

The Economics of Interfirm Networks

“…Finally, Hosono and Miyakawa detail their personal studies that use a natural experiment approach- Hosono et al (2012) and Miyakawa et al (2014)-and that are products of the overall research project. 12, Kaoru Hosono and Daisuke Miyakawa review the extant empirical literature on how bank lending affects firm activities.…”

“…4 Additionally, the empirical studies by Hosono et al (2012) and Miyakawa et al (2014) introduced in Chap. On one hand, there is evidence-including Rogoff and Reinhart (2009)-that a financial crisis has a long-lasting impact on the real economic activities, suggesting that an idiosyncratic shock can persistently affect an entire economy.…”