Quantitative Analysis of the Impact of Floods on Firms' Financial Conditions

Hiroki Yamamoto and Tomomi Naka
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Hiroki Yamamoto: Bank of Japan
Tomomi Naka: Bank of Japan

No 21-E-10, Bank of Japan Working Paper Series from Bank of Japan

Abstract: This paper quantitatively analyzes the impact of floods on firms' financial conditions from the perspective of contributing to the accumulation of basic research on climate-related financial risks, while taking into account the risk characteristics of Japan, where floods are one of the most common natural disasters. Since the damage from most floods tends to concentrate in a confined geographical area, a precise evaluation of their financial impact requires an assessment of sufficiently granular data, which is a challenge for the existing studies. In order to address that challenge, this paper combines Flood Statistics, which records almost all flood damage that has occurred in Japan at the municipality level, with firm-level financial data, and this makes it possible for us to analyze the impact of floods on firms' financial conditions with greater accuracy and granularity in comparison with previous studies. The three main conclusions of this paper are as follows. First, flood damage has a negative impact on the ratio of profit to sales, especially in the manufacturing industry. Second, the impact of floods on this ratio lessens in the short term. And third, the negative impact tends to be greater for firms located in municipalities that experienced floods with less frequency. Financial institutions need to pay close attention to the possibility that floods may cause more deterioration in firms' financial conditions than ever before as a consequence of climate change, and thus endeavor to enhance their risk management framework, bearing in mind that risk characteristics may vary depending on lenders' characteristics.

Keywords: Climate change; Natural disaster; Corporate finance; Physical risk; Financial Stability (search for similar items in EconPapers)
JEL-codes: C21 D22 Q54 R10 (search for similar items in EconPapers)
Date: 2021-07-20
New Economics Papers: this item is included in nep-env
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Citations: View citations in EconPapers (4)

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