Natural Disaster Risk and Corporate Leverage

49 Pages Posted: 8 Mar 2018 Last revised: 16 Oct 2018

See all articles by Ahmed Elnahas

Ahmed Elnahas

The University of Texas Rio Grande Valley

Dongnyoung Kim

California State University San Marcos

Incheol Kim

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship

Date Written: October 1, 2018

Abstract

Firms located in more disaster-prone counties adopt more conservative leverage policies than those in less disaster-prone counties. Compared to peers in the least disastrous areas, firms in the most disastrous areas are less levered by 3.6 percentage points, equivalent of foregoing $13.47 million. We argue that this systematic difference in leverage is attributed to elevated operating disruption, increased cost of capital, and tightened financial flexibility. Our findings indicate that firms incorporate natural disaster risk in financing decision, which is consistent with the trade-off theory of capital structure.

Keywords: Natural Disaster, Capital Structure, Leverage, Bank loan, Debt Maturity

JEL Classification: G32, L11, L25

Suggested Citation

Elnahas, Ahmed and Kim, Dongnyoung and Kim, Incheol, Natural Disaster Risk and Corporate Leverage (October 1, 2018). Available at SSRN: https://ssrn.com/abstract=3123468 or http://dx.doi.org/10.2139/ssrn.3123468

Ahmed Elnahas

The University of Texas Rio Grande Valley ( email )

1201 W. University Dr.
College of Business and Entrep
Edinburg, TX 78539
United States

Dongnyoung Kim

California State University San Marcos ( email )

United States
7607504248 (Phone)

Incheol Kim (Contact Author)

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship ( email )

1201 W University Dr
Edinburg, TX 78539
United States

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