Industrial Disasters, Financial Constraints, and Innovation: Firm-Level Evidence from China

Ying Lin, Lei Li and Jun Wen

Emerging Markets Finance and Trade, 2024, vol. 60, issue 7, 1377-1391

Abstract: This paper presents empirical evidence on the impact of industrial disasters on firm-specific innovation, focusing on the role of financial constraints. Using panel data of manufacturing firms in China from 2000 to 2013, our two-way fixed effects analyses confirm a statistically negative effect of industrial disasters on innovation in both the short run and the long run, and the negative effect is enhanced with the frequency of disasters. Another prefecture-level city panel from 2000 to 2019 further confirms the long-run and frequency-enhanced negative effect. The mechanism analysis shows that industrial disasters significantly increase interest rates and reduce bank lending to firms, which in turn reduces innovation. Moreover, ownership and size discrimination lead to asymmetric innovation effects on firms in the short and long run. Our results provide empirical evidence for the government to better allocate reconstruction funds and ensure firm innovation in the post-disaster period.

Date: 2024
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DOI: 10.1080/1540496X.2023.2278655

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