DOES HISTORICAL NATURAL DISASTER AFFECT CORPORATE RISK-TAKING NOWADAYS? — EVIDENCE FROM YELLOW RIVER FLOODING IN CHINA

Abstract

Frequent natural disasters have had an important impact on social development and human behavior. Based on quasi-natural experiments in the flooding area of Yellow River, this study investigates the impact of the historical Yellow River flooding on the risk-taking of modern enterprises by using Regression Discontinuity design. Our study finds that those enterprises located in the flooding area of Yellow River have significantly lower risk-taking capability than those not located in the flooding area of Yellow River. Our claim remains unchanged when we use a series of robustness checks and rule out some competing explanations. This negative influence can be attributed to three mechanisms, namely trust, religious belief and uncertainty avoidance. And the negative effects are subject to heterogeneity stemming from variations in an enterprise’s ownership structure and scale. More importantly, the negative impact of the Yellow River flooding on the risk-taking of enterprises can be alleviated in areas with a higher level of formal institution.