How Do Companies Respond to Natural Disasters? Evidence from Corporate Innovation

Using a sample of thirty-six major natural disasters that occurred in the United States between 1990 and 2015, we investigate the impact of natural disasters on the technological and product innovation activities of companies. We show that, overall, natural disasters have a significant effect on delaying corporate patent activity and trademark registrations for firms headquartered in those states affected by natural disasters. Natural disasters also exhibit a spillover effect, which negatively affects the innovation commitment of firms headquartered in states adjacent to disaster zones. We do not, however, observe a reduction in those patents that are specifically disaster-related among firms affected by natural disasters. In addition to the impact of natural disasters on innovation, we also investigate the transmission channels via which natural disasters discourage corporate innovation. Our analysis indicates that the decline in corporate innovation we observe in this study is associated with increased financial constraints of firms and reduced spending on research and development, and is linked to post-disaster relocation of inventors and innovators. Also, the negative consequences triggered by natural disasters are associated with reduced firm value. In light of the increasing threat of natural disasters in the world today, managers who aim to maintain the innovative edge of their companies may wish to consider our results when developing appropriate innovation/disaster-related management strategies