The impact of flooding on firm performance and economic growth

Abstract

Using comprehensive flood data from China, we find a significant, negative impact of flooding on firm performance, which is mainly driven by unexpected flooding. We use multiple identification strategies to address endogeneity concerns and find that the documented impact of flooding on firm performance is likely causal. The impact is more pronounced for firms with more tangible asset investment, firms located in cities with low government quality, firms facing tight financial constraints, firms controlled by non-government entities and firms with low geographic diversification. Flood-exposed firms react to the threat by altering their investment, financial, cash, payout and executive compensation policies. Finally, flooding also exerts a significant impact on local economic and employment growth.