I.VW Research Seminar – Marc Ragin, University of Georgia
Financing frictions may limit the risk management of businesses, increasing their vulnerability to shocks. We examine business financing outcomes following Hurricane Harvey. Our analyses use two novel datasets on private companies: the credit reports of 8,219 businesses and a survey of 273 local firms. We address two questions in our analyses. First, to what extent did Harvey cause firms financial distress? Using their exact street addresses, we match businesses’ credit reports with flood depths from Harvey in difference-in-differences estimations. Flooded firms fell behind on their debt obligations, though these businesses avoided the most serious credit outcomes such as bankruptcy. Only independent businesses show signs of distress; subsidiaries of larger firms do not. Second, how did firms finance losses from Harvey? Firms were largely uninsured for their losses and were often denied credit after Harvey. Many funded recovery through informal means, such as friends and family financing. Our study highlights and quantifies the challenges posed by financing frictions in the wake of a negative shock.