Natural disasters and corporate default risk

We investigate how exposure to natural disaster intensity impacts a firm's default risk. Analyzing data from 3753 disaster affected U.S. companies between 1994 and 2017, we find that firms located in areas with higher disaster intensity face increased default risk. This link holds across various tests and alternative measures of disaster intensity and default risk. We also show that limited financial access, reduced debt capacity, and higher operational risk worsen this effect. Additionally, financial institutions charge higher spreads and impose stricter credit terms on these firms. These findings highlight the need for stronger disaster support as current assistance may be inadequate for firms in disaster-prone areas, increasing their financial distress and default risk.