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The impact of extreme precipitation and flooding risk on corporate investment: Does government disaster preparedness matter?

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  • Cheng, Xi
  • Li, Jun
  • Feng, Chao

Abstract

This study investigates how corporate investment reacts to climate change risk and how disaster preparedness effort by local government stimulates corporate investment. We quantify city-level extreme precipitation and flooding risk through both daily precipitation and disaster event data. Our results show that firms raise their investment in response to extreme precipitation and flooding risk. Furthermore, recognizing the importance of government commitment to combat climate change, this study reveals that local disaster preparedness fosters corporate investment in productive activities amid escalating climate change challenges, which results from lower financial burdens for risk mitigation and decreased investment prudence for risk avoidance. We identify the decline in corporate resilience investment, precautionary cash holdings, and outward FDI due to local disaster preparedness. Additionally, we highlight that large firms are not only more responsive to climate change risk than smaller counterparts, but exhibit heightened reaction to local disaster preparedness. Our findings not only uncover the influence of extreme precipitation and flooding risk on corporate investment, but unpack how government disaster preparedness serves to enhance corporate sustainability under climate uncertainty.

Suggested Citation

  • Cheng, Xi & Li, Jun & Feng, Chao, 2025. "The impact of extreme precipitation and flooding risk on corporate investment: Does government disaster preparedness matter?," Economic Analysis and Policy, Elsevier, vol. 88(C), pages 926-946.
    • Handle: RePEc:eee:ecanpo:v:88:y:2025:i:c:p:926-946
    DOI: 10.1016/j.eap.2025.09.032
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