Do Banks Overreact to Disaster Risk?

63 Pages Posted: 6 Jul 2021 Last revised: 14 Nov 2024

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 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

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
449
Abstract Views
1,606
Rank
134,085
PlumX Metrics