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Do managers hedge disaster risk? Extreme earthquake shock and firm innovations

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  • Rao, Yonghui
  • Hu, Zijiang
  • Sharma, Susan Sunila

Abstract

In this paper, we investigate how extreme earthquake events affect energy firms' innovations to hedge disaster risk. On May 12, 2008, a magnitude-8 earthquake hit Sichuan province. It was the most damaging earthquake since the foundation of the People's Republic of China. Using the Great Wenchuan earthquake as a shock, we find the following: 1) the extreme disaster shock spurs innovations of firms with similar strong earthquake experiences. 2) The effect is pronounced for shock-proximate firms, firms with a negative previous experience, and firms with financial constraint. 3) We also find that labor protections and political pressure also drive firms to improve innovation activities after the extreme event. Overall, this study sheds light on determinants of energy firms' innovations from the perspective of extreme natural disasters.

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  • Rao, Yonghui & Hu, Zijiang & Sharma, Susan Sunila, 2021. "Do managers hedge disaster risk? Extreme earthquake shock and firm innovations," Pacific-Basin Finance Journal, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:pacfin:v:70:y:2021:i:c:s0927538x21001803
    DOI: 10.1016/j.pacfin.2021.101673
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    More about this item

    Keywords

    Extreme disaster event; Firm innovations; Salience effects; Labor protection; Political pressure;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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