Do Banks Overreact to Disaster Risk?
63 Pages Posted: 6 Jul 2021 Last revised: 14 Nov 2024
Date Written: May 12, 2020
Abstract
We examine how banks respond to natural disasters when borrowers are in proximity to the affected area. We find robust evidence that banks impose significantly higher spreads on firms in these areas following a disaster compared to other firms. This effect diminishes over time and distance, and is stronger for disasters with higher media coverage, as well as when loan officers are geographically closer to the disaster sites. The increased financing costs result in capital constraints for firms. Overall, our findings highlight a salience bias in banks’ evaluation of clients’ natural disaster risks, leading to adverse effects on borrowing firms.
Keywords: Disaster Risk; salience bias
JEL Classification: G21; G40; G41
Suggested Citation: Suggested Citation