Short-term shock, long-lasting payment: Evidence from the Lushan Earthquake

TL;DR

This study examines the short-term and long-term impacts of the 2013 Lushan Earthquake on Chinese public firms, revealing immediate financial declines and lasting asset losses, while also identifying temporary recovery effects in R&D and market share.

Contribution

It provides empirical evidence on how catastrophic earthquakes cause both immediate and permanent financial and operational changes in firms, using DID-PSM and event study methods.

Findings

Short-term liquidity and profitability decline significantly.

Permanent reduction in employment and fixed assets.

Temporary increase in R&D and market share growth.

Abstract

Abrupt catastrophic events bring business risks into firms. The paper introduces the Great Lushan Earthquake in 2013 in China as an unexpected shock to explore the causal effects on public firms in both the long and short term. DID-PSM methods are conducted to examine the robustness of causal inference. The identifications and estimations indicate that catastrophic shock significantly negatively impacts cash flow liquidity and profitability in the short term. Besides, the practical influences on firms' manufacturing and operation emerge in the treated group. Firms increase non-business expenditures and retained earnings as a financial measure to resist series risk during the shock period. As the long-term payment, the decline in production factors, particularly in employment level and the loss in fixed assets, are permanent. The earthquake's comprehensive interactions are also reflected. The recovery from the disaster would benefit the companies by raising the growth rate of R\&D and enhancing competitiveness through increasing market share, though these effects are temporary. PSM-DID and event study methods are implemented to investigate the general effects of specific strong earthquakes on local public firms nationwide. Consistent with the Lushan Earthquake, the ratio of cash flow to sales dropped drastically and recovered in 3 subsequent semesters. The shock on sales was transitory, only in the current semester.