Flood Insurance, Building Codes, and Public Adaptation: Implications for Airport Investment and Financial Constraints

Abderrahim Assab ()
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Abderrahim Assab: Accounting and Finance Group, University of Edinburgh Business School, University of Edinburgh, Edinburgh EH8 9JX, UK

JRFM, 2023, vol. 16, issue 8, 1-29

Abstract: This paper investigates the impact of flood management policies on airport investment and the resulting financial constraints. Specifically, it examines the effects of flood insurance, building codes, and public adaptation investment on the investment decisions of 100 United States airports located in flood-prone areas. The paper estimated the financial loss from extreme precipitations and flooding using novel data from the United States Federal Emergency Management Agency, and a differences-in-differences framework leveraging the introduction of the 2012 Biggert–Waters reform of the National Flood Insurance Program. The findings reveal that while flood insurance costs negatively influence overall airport investment, they do not significantly affect investment–cash sensitivity. On the other hand, the introduction of stricter building codes and public adaptation investment leads to increased cash usage for investment purposes, particularly among airports exposed to extreme precipitation and flood risks. Furthermore, the analysis suggests that the observed increase in financial constraints resulting from stricter building codes and public adaptation investment is likely driven by the asymmetry of information rather than the materiality of flood risk. In other words, public investment in flood risk reduction appears to signal to investors that the airport is exposed to flood risk, potentially leading to increased financial constraints. This finding highlights the importance of considering information asymmetry when assessing the impact of flood management policies on financial constraints. Understanding the underlying drivers of these effects is crucial for supporting resilient infrastructure development and informing effective decision-making in flood-prone areas.

Keywords: flood insurance; physical climate risk; flood risk management; financial constraints; infrastructure finance; climate finance; NFIP; Biggert–Waters (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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