Natural disasters, trade credit, and firm performance

With the increasing frequency and intensity of destructive weather events, firms' access to financing following disasters is critical. Few studies have investigated firms' access to trade credit after natural disasters. We examine whether and how natural disasters, particularly urban floods, affect firms’ trade credit. Using a sample of Chinese companies from 2014 to 2019, we provide robust evidence that trade credit goes up after the occurrence of a flood disaster, an effect lasting about two years. The increase in trade credit is more pronounced for nonstate-owned, politically unconnected firms and firms located in areas with higher trust and collectivism. Channel analysis shows that the positive relationship is primarily due to credit constraints, confirming the substitution hypothesis of trade credit. Following a disaster, firms with access to additional trade credit experience a significant increase in firm performance. Our results are robust to endogeneity concerns and alternative explanations.