ESSAYS ON FINANCE AND POLITICS OF DISASTER LOANS

Abstract

My dissertation consists of two essays that explore important aspects of empirical corporate finance, specifically the importance of political factors and public attention that come in to play in the granting of post-disaster loans. The first paper, “Natural disasters, public attention, and disaster lending”, examines how public attention (as measured by a Google search metric that I constructed) to local natural disasters affects firms’ access to debt. I hypothesize that the lending behavior of creditors in the aftermath of a natural disaster would be strongly influenced by two factors: (1) direct governmental pressure on local and foreign banks, and (2) indirect pressure from local community sentiment. National governments are influenced by public attention around the local natural disaster. They also use the degree of public attention to pressure private banks and state banks to make disaster loans to firms affected by the natural disasters. I posit that the influence and effectiveness of the governmental pressure would be a function of the degree to which the embedding economy has state-owned banks and nationalized banks. Governmental pressure would be limited in its impact in economies that are private (as in the United States or the United Kingdom). The empirical investigation in my first paper will make use of two novel multidimensional cognitive indices using machine learning. The first index (natural disaster intensity index) captures the intensity of the natural disaster. The second index measures the degree of public attention to natural disasters in the local community and is constructed by using Google Trends search data (web searches, image searches, online news searches, and YouTube video searches). Using firm-level and natural disaster data from 30 countries, I document that firms are able to borrow more when there is a heightened public attention to the natural disaster. I also find that different types of media searches (i.e., web searches, online news searches, image searches and YouTube video searches) have differential impact on public attention, and hence, on incremental borrowing by affected firms. I examine the change in debt likelihood as a function of the proportion of image searches (i.e., relative importance of image searches divided by the total of all four types of searches). Here, I observe a nonlinear relationship between the increase in debt likelihood and the proportion of image searches. The increase in debt likelihood has an “inverted U-shaped” relationship with the degree of image searches. I also find similar relationship between the increase in debt likelihood and the proportion of online news searches and web searches. The response of debt likelihood to public attention is higher in countries with a higher historical vulnerability to natural disasters. The response of debt likelihood to public attention is higher following earthquakes and wildfires. I also document an increase in debt likelihood following disasters to which there is heightened public attention in economies with a smaller fraction of state-owned banks. This relationship also obtains in economies with a smaller fraction of foreign banks in the banking sector. This paper addresses important issues of access to debt financing for firms affected by natural disasters. I construct various indices of the degree of community attention and use them as proxies for the importance of political factors and governmental pressure that can influence the change in leverage following the natural disaster. I use novel metrics of public attention based on big data and media search using machine learning for firms around the world. Firms affected by the natural disaster are often at the mercy of access to finance from the relief efforts of the local government and the local banking sector. The availability of disaster loans may have dramatic and long-run effects on the ability of the community to cope with the disaster. Lack of access to capital in such situations (including Covid-19) is an important societal issue, affecting corporate bankruptcies and unemployment. The issue is how the private sector will react to natural disasters with or without government support. This paper provides a novel and behavioral explanation for disaster financing and examines several predictions using novel data and novel metrics to measure the intensity of community sentiment and attention. The second paper, “Polls, Politics and SBA Disaster Loans”, examines the effect of certain important political factors (e.g., the current national popularity of the incumbent U.S. President) on the federal disaster relief effort through the SBA (Small Business Administration)’s disaster loan program. Following natural disasters, there often is a staggering amount of economic damage and even loss of life. A call for government intervention usually follows. In this paper, I use different types of presidencies (i.e., the environmental presidency, the semi-environmental presidency, the pandering presidency, and the classic presidency) to explain the expected impact of current presidential popularity on the willingness of the incumbent U.S. President to authorize federal disaster relief. I also study the influence of the presidential popularity and various related political factors on the intensity of the relief approved and administered through the SBA disaster loan programs. This paper consists of two parts. The first part investigates the impact of the current presidential popularity on the willingness of the incumbent U.S. President to authorize federal disaster relief. Using a unique sample of 1,118 presidential disaster declaration requests from 1991 to 2020, I document an inverted U-shaped effect of the current presidential popularity on the likelihood of a presidential authorization for federal disaster relief. I hypothesize that these results are consistent with the prediction of the semi-environmental presidency model. When the current presidential popularity of the incumbent U.S. President is below 50%, the popularity benefits of using a generous federal disaster relief is important and explains the positive relationship between her popularity and the likelihood of approval. The U.S. President acts like an environmental U.S. President. However, if presidential popularity is greater than 50%, the incumbent U.S. President will be more cautious about authorizing federal disaster relief since the opportunity cost of foregoing important non-environmental related policy initiatives may be higher than the benefits of approving federal disaster relief. The incumbent U.S. President may also supplement the powers granted to her in the U.S. Constitution with the acquired informal powers when her current popularity is higher than 50% in order to realize her own non-environmental related political agenda more easily. In this case, an increase in the U.S. President’s current level of popularity would lead to a decline in the likelihood of her approving federal disaster relief, and they would not be acting as an environmental U.S. President. The second part of this paper investigates how the personal popularity of the incumbent U.S. President impacts the allocation of federal disaster relief to affected counties through the SBA following the authorization of federal disaster relief. I document that the SBA will approve larger amount of disaster loans to disaster-affected households, businesses, and non-profit organizations when the current popularity of the incumbent U.S. President increases. I find that this result is amplified when the incumbent president is (1) a Republican, (2) a second-term president, and (3) not contesting an election in that year. The main findings are robust to different measures of presidential popularity and various estimation methodologies. My contributions in this paper highlight a new venue for politics in climate change in the area of disaster relief. I explore how current public standing of the incumbent U.S. President impacts the disaster relief effort using the SBA disaster loan program. I believe that this is an important area of the interaction of politics and climate finance. Natural disasters and responses to it have become an important topic of the study of climate change, given the increasing frequency and severity of disasters arising from climate change. The politics involving the current pandemic and relief efforts has put this topic in prominent relief (See COVID-19 crisis).