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Quantitative Analysis of the Impact of Floods on Firms' Financial Conditions

Author

Listed:
  • Hiroki Yamamoto

    (Bank of Japan)

  • Tomomi Naka

    (Bank of Japan)

Abstract

This paper quantitatively analyzes the impact of floods on firms' financial conditions from the perspective of contributing to the accumulation of basic research on climate-related financial risks, while taking into account the risk characteristics of Japan, where floods are one of the most common natural disasters. Since the damage from most floods tends to concentrate in a confined geographical area, a precise evaluation of their financial impact requires an assessment of sufficiently granular data, which is a challenge for the existing studies. In order to address that challenge, this paper combines Flood Statistics, which records almost all flood damage that has occurred in Japan at the municipality level, with firm-level financial data, and this makes it possible for us to analyze the impact of floods on firms' financial conditions with greater accuracy and granularity in comparison with previous studies. The three main conclusions of this paper are as follows. First, flood damage has a negative impact on the ratio of profit to sales, especially in the manufacturing industry. Second, the impact of floods on this ratio lessens in the short term. And third, the negative impact tends to be greater for firms located in municipalities that experienced floods with less frequency. Financial institutions need to pay close attention to the possibility that floods may cause more deterioration in firms' financial conditions than ever before as a consequence of climate change, and thus endeavor to enhance their risk management framework, bearing in mind that risk characteristics may vary depending on lenders' characteristics.

Suggested Citation

  • Hiroki Yamamoto & Tomomi Naka, 2021. "Quantitative Analysis of the Impact of Floods on Firms' Financial Conditions," Bank of Japan Working Paper Series 21-E-10, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp21e10
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    File URL: https://www.boj.or.jp/en/research/wps_rev/wps_2021/data/wp21e10.pdf
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    References listed on IDEAS

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    Cited by:

    1. Takuro Ashizawa & Nao Sudo & Hiroki Yamamoto, 2022. "How Do Floods Affect the Economy? An Empirical Analysis using Japanese Flood Data," Bank of Japan Working Paper Series 22-E-6, Bank of Japan.
    2. Apurba Roy & Ilan Noy, 2023. "Impact of extratropical cyclones, floods, and wildfires on firms’ financial performance in New Zealand," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 25(4), pages 493-574, October.
    3. Yoshiyasu Koide & Kenji Nishizaki & Nao Sudo, 2022. "Flood Risk Perception and its Impact on Land Prices in Japan," Bank of Japan Working Paper Series 22-E-12, Bank of Japan.

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    More about this item

    Keywords

    Climate change; Natural disaster; Corporate finance; Physical risk; Financial Stability;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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