Flirting With Disasters: Do Firms Financially Plan Ahead for Disasters?

Abstract

There are two types of disasters: natural (Acts of God) and technological (human-caused) disasters. I investigate whether and under which conditions firms are hoarding precautionary cash holdings to address natural disaster risk, technological disaster risk or both. The empirical analysis requires me to introduce a novel multidimensional risk measure for each type of disaster as early warning sign for possible future disaster strikes. Using these measures, I provide evidence that firms do not trade-off between these two types of disasters in determining their cash policy. Firms prioritize the preparedness of possible natural disaster strikes above possible technological accidents. The natural disaster related precautionary cash holdings hoarding policy is a long-term policy option that is funded by using external financing and focused on a few disaster types such as wildfires and landslides. Firms address only technological disaster risk by precautionary hoarding cash holdings when they are less internal financially constrained or in smaller countries by surface area.