Do Banks Overreact to Disaster Risk?

52 Pages Posted: 6 Jul 2021 Last revised: 6 Apr 2022

See all articles by Qianqian Huang

Qianqian Huang

City University of Hong Kong

Feng Jiang

University at Buffalo - School of Management

Yuhai Xuan

University of California, Irvine - Paul Merage School of Business

Tao Yuan

Nanjing University - School of Business

Date Written: May 12, 2020

Abstract

We examine how banks respond to natural disasters when borrowers are adjacent to the disaster area. We find robust evidence that banks charge significantly higher spreads to firms located in these areas following a disaster than they charge to other firms. The observed effect is unlikely to be driven by regional spillovers, limited credit supply, rational learning, or lender rent extraction. Bank lenders also respond to faraway severe disasters if the borrowing firm is vulnerable to a similar type of disaster risk. Overall, our findings indicate that banks are subject to salience bias when assessing their clients' natural disaster risk.

Keywords: Disaster Risk; salience bias

JEL Classification: G21; G40; G41

Suggested Citation

Huang, Qianqian and Jiang, Feng and Xuan, Yuhai and Yuan, Tao, Do Banks Overreact to Disaster Risk? (May 12, 2020). Available at SSRN: https://ssrn.com/abstract=3871505 or http://dx.doi.org/10.2139/ssrn.3871505

Qianqian Huang (Contact Author)

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
852-3442-0284 (Fax)

Feng Jiang

University at Buffalo - School of Management ( email )

344 Jacobs Management Center
Buffalo, NY 14260
United States
716-645-3225 (Phone)

Yuhai Xuan

University of California, Irvine - Paul Merage School of Business ( email )

4291 Pereira Drive
Irvine, CA California 92697-3125
United States

HOME PAGE: http://yuhai.merage.uci.edu/

Tao Yuan

Nanjing University - School of Business ( email )

22 Hankou Road
Nanjing, Jiangsu 210093 210093
China

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