Fiscal Constraints, Disaster Vulnerability, and Corporate Investment Decisions

Abstract
This paper empirically studies the role of fiscal constraints for disaster vulnerability and investment decisions in a global sample of firms. We build novel firm-level measures of exposure to fiscal constraints based on the sales distributions of firms across countries. This approach allows us to exploit variation among firms headquartered in the same country and operating in the same industry. During disasters, more exposed firms become riskier, as evidenced by an increase in their market comovement, coupled with discussions on fiscal constraints risk during earnings conference calls. Pre-disaster, firms with larger exposures to fiscal constraints realize higher returns, use higher discount rates in investment decisions, and invest less in tangible capital and R&D. Our findings suggest that fiscal constraints affect long-term growth through a risk-based disaster-vulnerability channel.