The effect of extreme rainfall on corporate financing policies

Abstract

In recent years, a series of intense precipitation events has drawn public attention to the issue of extreme rainfall. This study examines the impact of precipitation anomalies on corporate financing policies and reveals that firms tend to increase their utilization of long-term debt (while decreasing their reliance on short-term debt), enhance cash reserves, and reduce cash dividend payouts in response to heightened occurrences of extreme rainfall. We provide empirical evidence indicating that such weather events can have adverse effects on firms' operational activities. The influence of extreme precipitation is particularly pronounced in sectors sensitive to rainfall, firms with geographically concentrated factories, non-state-owned enterprises, and those located in cities with limited financial institutions. Overall, this research demonstrates that firms are inclined to adjust their financing policies in response to extreme rainfall events, underscoring the significance of financial resilience in managing climate risks and shedding light on firms' financing decisions.