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Natural Disasters, Damage to Banks, and Firm Investment

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  • HOSONO Kaoru
  • MIYAKAWA Daisuke
  • UCHINO Taisuke
  • HAZAMA Makoto
  • ONO Arito
  • UCHIDA Hirofumi
  • UESUGI Iichiro

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.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 12062.

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Length: 31 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:eti:dpaper:12062

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Cited by:
  1. MIYAKAWA Daisuke & HOSONO Kaoru & UCHINO Taisuke & ONO Arito & UCHIDA Hirofumi & UESUGI Iichiro, 2014. "Financial Shocks and Firm Exports: A natural experiment approach with a massive earthquake," Discussion papers 14010, Research Institute of Economy, Trade and Industry (RIETI).
  2. Uchida, Hirofumi & Miyakawa, Daisuke & Hosono, Kaoru & Ono, Arito & Uchino, Taisuke & Uesugi, Iichiro, 2013. "Natural Disaster and Natural Selection," Working Paper Series 25, Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University.

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